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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER: 0-14082
MERRILL CORPORATION
(Exact name of Registrant as specified in its charter)
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MINNESOTA 41-0946258
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE MERRILL CIRCLE
ST. PAUL, MINNESOTA 55108
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (612) 646-4501
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of April 23, 1998, 16,392,386 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
Registrant as of that date (based upon the last reported sale price of the
Common Stock at that date by the Nasdaq National Market) excluding outstanding
shares owned beneficially by officers and directors, was approximately
$305,310,000.
DOCUMENTS INCORPORATED BY REFERENCE
This Report does not repeat important information that you can find in
selected pages of our Annual Report to Shareholders for the year ended January
31, 1998 (Annual Report) and in our Proxy Statement for our Annual Meeting on
May 28, 1998 (Proxy Statement). The SEC allows us to "incorporate by reference"
portions of these documents, which means that we can disclose important
information to you by referring you to other documents which are legally
considered to be a part of this Report. We encourage you to read the referenced
pages in the Annual Report and Proxy Statement for a more thorough understanding
of our company and business.
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TABLE OF CONTENTS
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PART I.......................................................................... 1
ITEM 1. BUSINESS.......................................................... 1
ITEM 2. PROPERTIES........................................................ 7
ITEM 3. LEGAL PROCEEDINGS................................................. 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 8
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 8
PART II......................................................................... 9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................... 9
ITEM 6. SELECTED FINANCIAL DATA........................................... 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 9
PART III........................................................................ 10
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 10
ITEM 11. EXECUTIVE COMPENSATION............................................ 10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 10
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 10
PART IV......................................................................... 11
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM
8-K............................................................... 11
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE............................................... 13
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS................................ 14
SIGNATURES...................................................................... 15
EXHIBIT INDEX................................................................... 16
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Merrill Corporation provides a full range of typesetting, printing, document
management and reproduction, distribution and marketing communication services
to financial, legal, investment companies and corporate markets. Our
headquarters are in St. Paul, Minnesota and we have 31 other locations in major
cities across the United States, including six regional printing plants and two
distribution centers. We also service financial and corporate printing clients
internationally with partners in Canada, Europe and Asia, and through
arrangements with printing companies in many cities around the world.
Since February 1, 1997, we have acquired two businesses. On February 21,
1997, we bought most of the assets of Roald Marth Learning Systems, Inc. which
used the name Superstar Computing. It is now called Merrill Training and
Technology. Merrill Training and Technology provides computer systems and
training to the real estate industry. On September 30, 1997, we bought some of
the assets of Total Management Support Services, LLC, a document management
services company.
Merrill Corporation is a Minnesota corporation that was organized in 1968
under the name "K.F. Merrill Company." Our main offices are at One Merrill
Circle, Energy Park, St. Paul, Minnesota 55108, telephone (612) 646-4501.
Unless it does not make sense in the sentence, when we use "Company,"
"Merrill," "our" or "we," those terms also include our subsidiaries, Merrill/New
York Company, Merrill/Magnus Publishing Corporation, Merrill Corporation,
Canada, Merrill/May, Inc., Merrill International, Inc., Merrill Real Estate
Company, FMC Resource Management Corporation and Merrill Training & Technology,
Inc.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Since we started in 1968, Merrill's revenues, operating profits and assets
have come from one business segment: we have provided document typesetting,
printing, management and reproduction, distribution and marketing communication
services for the financial, legal, investment company and corporate markets.
Please refer to pages 13 to 27 of our 1998 Annual Report to Shareholders for
more information. That information is part of our disclosure in this Report.
(c) NARRATIVE DESCRIPTION OF BUSINESS
We are a document management and services company; we use advanced computer
and telecommunication technology to provide a full range of services to our
customers. These services include typesetting, printing, electronic document
formation, reproduction, facilities management, distribution and marketing
communication services. We market these services through the following product
sectors: Financial Document Services, Investment Company Services, Document
Management Services, and Managed Communications Programs.
CATEGORIES OF SERVICE
We divide our revenue into four groups: Financial, Corporate, Document
Management Services and Commercial and Other work. The following table shows the
percentage of revenue Merrill has produced in each of those groups for our past
three fiscal years:
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YEAR ENDED JANUARY 31,
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CATEGORY OF SERVICE 1998 1997 1996
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Financial............... 38.2% 40.6% 36.1%
Corporate............... 31.6% 27.6% 29.5%
Document Management
Services............... 11.7% 11.2% 12.9%
Commercial and Other.... 18.5% 20.6% 21.5%
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Total............... 100.0% 100.0% 100.0%
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FINANCIAL AND CORPORATE
GENERAL
The Financial revenue category includes the production and distribution of
time-sensitive, transactional financial documents, such as registration
statements, prospectuses and other printed
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materials that are part of business financings and acquisitions.
Our Corporate revenue category includes the production and distribution of
corporate documents that our clients provide at regular intervals. Corporate
revenue includes documents marketed through both our Financial Document Services
and Investment Company Services product sectors. Some examples are annual and
quarterly reports and proxy materials for companies. Other examples are
registration statements, compliance and marketing materials for unit investment
trusts and mutual funds. We use the same technology and people to provide both
Financial and Corporate printing services.
We are a service-oriented company. The production of financial and corporate
documents requires rapid typesetting, printing and electronic conversion
services that are available twenty-four hours per day and tailored to the
exacting demands of our customers. We receive information directly from our
customers in various forms, including typed or handwritten pages, tapes, faxes,
disks, Internet-based files, and direct links from customers' computers. The
information may come into one of our offices, which will transmit it by fax or
direct electronic connection (modem) to our centralized production facilities
for processing into a typeset or electronic document. Each document typically
goes through many cycles of proofreading and editing. Each version of a document
is typeset or converted to an electronic format required by the SEC (EDGAR), and
distributed to the people drafting it, including corporate executives,
investment bankers, attorneys and accountants. If the drafters are in different
cities, the proofs must be delivered simultaneously to different parts of the
country. Proofs are delivered to our customers on paper or electronically using
our E-PROOF-TM- proprietary system. e:Proof provides secure, on-screen versions
of documents that look like the originals and can be viewed, printed or e-mailed
anywhere in the world, from almost any computer.
Just before the final version of a financial or corporate document is
completed, the drafting group will usually meet in one of our conference rooms
in our offices. These "in-houses" are one of the most time-critical services
that we provide. In-house sessions require the accurate and rapid turnaround of
the edited pages and expert knowledge of the documents and filing requirements
of the SEC. We also need to provide a comfortable and pleasant environment for
the many hours of drafting. After the customers have made their final changes,
we quickly prepare an electronic submission for filing through EDGAR. We also
may create paper copies of the document and exhibits for filing with the SEC and
other regulatory authorities. The document is then printed, collated, bound and
distributed in booklet form. We can also produce material electronically for
distribution via the Internet in PDF or HTML formats (computer coding that makes
it possible to look at pages of text on a computer screen).
"HUB AND SPOKE" NETWORK
We use computers and telecommunication technology to create a "hub and
spoke" network for Merrill's financial and corporate services, linking our
typesetting centers in St. Paul and suburban Baltimore (the hubs) with our 23
service facilities in the United States (the spokes). We also have the
technology to link the hubs directly to our customers and to our international
partners and affiliates.
CENTRAL COMPUTERIZED PRODUCTION FACILITY. Merrill has computer systems in
our central production facility located in St. Paul that work with communication
technology and software we have developed. We use computers, communication
controllers, text entry and editing stations, laser typesetting equipment, and a
number of special purpose computer subsystems for data conversion and
information management. Each critical piece of equipment in the system has at
least one back-up device. We designed the computer systems to be high-
performance, reliable, and secure.
The concentration of equipment and typesetting personnel in a central
facility has been a key Merrill strategy to reduce overhead and labor costs,
train people more effectively, and use our resources efficiently. In addition,
with the growth of the Company, a second hub in suburban Baltimore has given us
regional focus and stronger backup in case of a disaster to the St. Paul hub. We
believe we benefit more quickly from new technologies that have decreased costs
and improved the quality of our service, since new technologies and methods in
the hub facilities immediately benefit the spoke facilities. We also
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believe that we are better able to allocate our typesetting resources when and
where our customers need them.
NATIONAL COMMUNICATIONS NETWORK. Merrill has a self-contained
telecommunication network connecting our service facilities with the hubs. We
transmit documents and production control information electronically among our
offices. The network consists of digital lines connecting each of our service
facilities with the hubs, automated data switching and routing
equipment and the software that controls the communications. Designed to operate
continuously, the network is highly efficient and reliable. We have back-up
service for each section of the network, in case any of it fails to operate.
SERVICE FACILITIES. Merrill staffs service facilities with sales,
administrative, customer service, production, duplication and distribution
personnel. The service facilities have conference rooms with support staff,
office equipment and amenities to give our customers a comfortable work
environment in which to meet, write and revise their documents. The service
facilities have photo-imaging equipment to produce high quality images using the
electronic information received from the hubs. Within minutes of completion, we
can transmit documents to one or more service facilities for distribution.
MERRILLLINK-TM-. We developed the MERRILLLINK system to connect our hubs to
other locations through the use of portable printing devices in the client's
office or at our smaller sales offices. We can edit typeset pages and provide
proof distribution to remote locations throughout the world. MERRILLLINK lets us
do business almost anywhere. The system is particularly helpful in our financial
work where our customers require a quick turnaround
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INTERNATIONAL SERVICE. Merrill and Burrups, Ltd., a London-based financial
printing company, jointly market international financial transaction business
worldwide. Both companies work together to give customers integrated document
typesetting, printing and distribution services wherever the document originates
or needs to be delivered. Besides London, Burrups has full service facilities in
Frankfurt, Luxembourg, Paris, and Tokyo and Merrill/Burrups has additional
facilities in Hong Kong, Singapore, Melbourne and Tel Aviv for use in our joint
international service.
We also market and service financial and corporate documents in Canada
through a joint venture with Quebecor Printing, Inc., a large commercial printer
based in Montreal. Quebecor Merrill Canada, Inc. has full service facilities in
Calgary, Montreal, Toronto, and Vancouver.
We have also established relationships with financial printing companies in
44 countries who provide services to us on an "as needed" basis. We have the
software and hardware for electronic communications between our production hubs
and the international service facilities. With this electronic connection and
the MERRILLLINK system, we can transmit high-quality typeset documents for
printing and distribution throughout the world without the time delays and costs
of air shipment.
THE JOB CONTROL SYSTEM. We coordinate the activities of our service
facilities through our own Job Control System (JCS). This system tracks each
document from the time we receive it through production and billing. Information
can be sent to and retrieved from the JCS by any service facility and can be
immediately read in the hubs. During the production phase, the JCS assigns job
numbers and tracks information about the document, such as dates and the times
at which proofs are due, style and job specifications, messages regarding the
job and last-minute changes. Distribution of drafts is a critical task in the
preparation of financial documents, and the JCS simplifies this task. It keeps a
current address list for each job, the history of the distribution, and the
method of delivery for each proof. We also use the production information
collected in the JCS for billing.
EDGAR AND SEDAR-REGISTERED TRADEMARK-
The SEC requires public companies or their agents to file most disclosure
information in an electronic format through EDGAR, rather than in paper. This
electronic format, usually in ASCII, includes additional submission information
and coding "tags" embedded in the document. The SEC uses this embedded
information to analyze the document and to help the public retrieve these
disclosures. EDGAR filings are generally delivered by modem on a telephone line,
but may be delivered on magnetic computer tape or by
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diskette. We convert SEC forms and exhibit documents from standard word
processing and other computer formats to the EDGAR format and we then assemble
these documents for electronic filing with the SEC.
Merrill has been involved in all stages of EDGAR's development. We wrote
software that enables us to prepare documents in single source files and file
the electronic version of financial and corporate documents quickly. "Single
source files" mean we make only one set of corrections to alter both the
electronic and print files -- reducing the chance of inconsistency. We have a
dedicated data line directly to the SEC's computers, which avoids busy signals
and other tie-ups. In addition, we have trained our staff extensively to
coordinate the preparation of these EDGAR filings. We keep participants informed
of EDGAR developments by publishing quarterly Merrill's EDGAR ADVISOR-TM-, a
newsletter distributed to lawyers, corporate executives and other readers. We
conduct seminars throughout the country on EDGAR. Customers may call our
toll-free EDGAR information line. We also publish a variety of reference
materials on EDGAR rules, forms, and procedures.
We have experienced high demand levels for EDGAR filing services in both our
financial and corporate categories of services. Many public companies choose not
to manage their own EDGAR filings and use outside services to meet EDGAR filing
requirements. We believe that our full array of EDGAR services will continue to
enhance the need for our other time-sensitive document services.
SEDAR-Registered Trademark- (System for Electronic Document Analysis and
Retrieval) is Canada's system for electronic disclosure by public companies. We
offer a full range of SEDAR services, including a section on SEDAR in the EDGAR
ADVISOR.
SEDAR IS A REGISTERED TRADEMARK OF THE CANADIAN SECURITIES ADMINISTRATORS.
DOCUMENT MANAGEMENT SERVICES
Merrill provides comprehensive document management services for our
customers. We work both on an ongoing basis, which can include management of the
client's entire photocopying, typesetting, imaging and/or mailroom facilities,
and on a transactional basis, which includes photocopying and electronic imaging
services on an as needed basis.
We offer comprehensive office photocopying, typesetting and mailroom
facility management services to our customers in Document Service Centers (DSCs)
within their offices. These services involve providing for a client's document
management needs, including on-site employees, equipment and management of the
operation.
We typically enter into three-year agreements with our clients to provide a
range of services at their location. We help our customers determine their
needs, and provide the equipment, staff, and management to meet those needs.
Since most of our DSCs are located in cities where we have our own service
facilities, we can provide back-up capacity and personnel to our DSC customers
as needed.
The transactional business includes document reproduction for projects that
are time-sensitive or otherwise require special service, such as photocopying
documents for large litigation matters. We produce the photocopies at our own
service facilities or we place photocopying equipment and personnel at the
client's office. Document reproduction services require rapid turnaround and
availability twenty-four hours per day. Our document reproduction customers
typically have several boxes of documents that may be in file folders, stapled
or on varying sizes of paper. We take apart, photocopy and reassemble the
original documents as instructed by the client. We also provide sequential
numbering, binding and imaging services for these documents, if requested.
Photocopying projects range from single copies of short documents to very
complicated tasks.
Our service facilities include document management equipment and personnel.
Each service facility is equipped with high-performance photocopying equipment.
We make efficient use of this equipment by performing project photocopying
during times when the equipment would otherwise be idle. We also operate
document reproduction facilities in Century City (Los Angeles area) and Union,
New Jersey.
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COMMERCIAL AND OTHER SERVICES
GENERAL
The Commercial and Other revenue category includes document services
performed by our Merrill/May, Inc. (Merrill/May), FMC Resource Management
Corporation (FMC) and Merrill Training & Technology, Inc. (MTT) subsidiaries, as
well as revenue from the production of other commercial documents, including
health care provider directories, price catalogs, insurance industry annual
reports, sample ballots, directories, and technical manuals from electronic
information supplied by customers. Merrill/May provides custom marketing
communication services to corporate customers and demand printing and
distribution services designed to promote the corporate identity of large,
national customers with multiple franchisees, members, divisions or affiliated
organizations, including real estate companies, fast food restaurants, and
credit card companies. FMC provides manufacturing, distribution, and inventory
management services of marketing items for large, geographically diverse
companies, such as department stores. MTT provides computer systems and training
to the real estate industry.
MANAGED COMMUNICATIONS PROGRAMS
We provide demand printing and fulfillment of "corporate identity" materials
- -- brochures, business cards, even clothing that carries the distinctive marks
and symbols of those corporations. We call this Managed Communications Programs.
Our customers are usually large, national customers with multiple franchisees,
members, divisions or affiliated organizations (member organizations).
We also provide manufacturing, fulfillment, and inventory management
services, such as commercial printing, business forms, digital printing, display
items, collateral materials, (i.e., hangers, pricetags, and point of purchase
signage), and gift certificates for large companies with multiple locations and
departments that
are seeking consistency throughout the organization.
We can produce multi-color, highly technical, commercial quality printed
materials. We develop, produce, and prepare a catalog of the printed products,
which includes other promotional merchandise produced by third parties. We also
distribute the client-specific catalogs to the client's member organizations. To
our real estate customers, we also offer computer hardware, training and
technology services.
We develop direct relationships with the individual member organizations,
which are often independently owned and operated and make their own print
purchasing decisions. We use a sophisticated order entry system, including a
large inbound telemarketing staff, to receive and process orders. A member
organization or an individual can place an order by mail, fax or toll free
number. Our customer service representative processing the order will have
access to the client's purchase history (if an existing client) and can suggest
reordering certain items, cross-sell complementary items or alert the client to
current specials.
We produce printed materials in large quantities, which we warehouse pending
receipt of an order. Products ordered from a catalog typically require
additional "personalizing" for the ordering member organization. They are
checked for quality, packaged and shipped. Promotional merchandise (point of
purchase, advertising specialty, premiums and incentives) included in a catalog
that are produced by third parties are generally shipped directly by the
manufacturer to the ordering member organization. We use a materials handling
system with automated handling, order consolidation and shipping. Most orders
are filled within four days of receipt.
Our centralized production and fulfillment center in St. Cloud, Minnesota
benefits both the national account client and its member organizations. The
national account client can control the use of its trademarks and enjoy the
economies of mass production. The members, the ultimate consumers of our
services, receive quality products, fast delivery and prices that we believe are
competitive with prices charged by local print shops.
Mutual fund and other investment companies also use our suite of fulfillment
services, including MERRILLCONNECT-TM- software. MERRILLCONNECT tracks client
contacts, marketing materials, and responses in a closed-loop system.
Our Managed Communications Programs customers are located in all fifty
states and Canada, with limited shipments to Mexico, Puerto Rico, France,
Germany, England, Guam, the Virgin Islands, Italy, Spain, Singapore and the
Cayman Islands.
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We also provide custom marketing communications and publishing services,
primarily to financial services companies, media organizations, retailers and
the health care industry. The types of custom publications we produce include
magazines, tabloids, newsletters, booklets and catalogs used by customers for
their marketing purposes. We work with customers in the design, editorial
content and mailing lists for these publications. We typeset, print and mail the
publications. Most often, we operate on annual contracts for this work.
Our commercial typesetting business provides full document services,
including camera, pre-press and printing services for one- or multi-color
publications. These commercial printing projects, like financial and corporate
printing, require a high level of attention to detail, quick turnaround times,
and responsive customer service. We believe that offering a high level of
specialty service is a competitive advantage in certain niches of the commercial
printing business.
PRINTING SERVICES
We currently operate printing plants in St. Paul, Los Angeles, Chicago,
Dallas and New Jersey. We have found it advantageous to operate printing presses
at these locations to service our Financial Document Services customers, and
service a portion of our recurring corporate and commercial printing business.
Corporate and commercial printing is generally more predictable in volume and
less time-sensitive in nature than financial printing. Because we use the
presses for both types of printing, we retain the flexibility to meet the
immediate demands of financial printing.
In all markets, we have identified several printers capable of meeting our
production needs on an "as required" basis. We use associated printers when we
need additional capacity in markets where we do not own presses, when special
printing equipment is needed, or when we have overflow work. We generally select
associated printers on a job-by-job basis, based upon considerations of price,
availability and suitability of press equipment.
We also operate a printing plant in St. Cloud, Minnesota, for our
specialized color printing services. SEE BUSINESS -- COMMERCIAL AND OTHER
SERVICES -- MANAGED COMMUNICATIONS PROGRAMS ABOVE.
MARKETING AND CUSTOMERS
We market our services through the following product sectors:
- Financial Document Services (includes transaction and compliance
documents)
- Investment Company Services
- Document Management Services
- Managed Communications Programs
We sell our products and services nationwide through a direct sales
organization operating from our service facilities and sales offices. We market
in Canada through employees of our joint venture, Quebecor Merrill Canada Inc.
Internationally, we sell with Burrups, Ltd. through the direct sales by
employees of each company.
We direct our Financial Document Services to executives of corporations
whose securities are or are about to be publicly traded. We also sell to the
advisers to those companies -- corporate finance underwriters, municipal bond
underwriters, and attorneys, as well as others who require fast and accurate
typesetting.
Investment Company Services are marketed to mutual fund and unit investment
trust managers.
Our Document Management Services are marketed primarily to lawyers,
paralegals, law office administrators, and legal departments of corporations.
We market Managed Communications Programs through direct sales teams based
in several major markets throughout the United States.
We market our demand printing and distribution services to large, national
customers with multiple franchisees, members, divisions or affiliated
organizations and our custom publication services to financial service companies
(such as banks, credit unions and insurance companies), television and radio
stations and networks, trade associations, manufacturers and vacation travel
industries. We sell our commercial printing services primarily to corporations,
associations, insurance companies and legal, institutional and governmental
publishers. We sell computer training and technology services to real estate
agents through industry networking, telemarketing and other direct marketing
methods.
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As of April 15, 1998, we employed 288 full-time salespeople to market
typesetting, printing, publishing, distribution, document management,
reproduction and managed communication services. Our salespeople solicit
business from existing and prospective customers. Together with the customer
service representatives, the sales team helps coordinate our services and
provides advice and assistance to customers.
COMPETITION
Merrill competes with many domestic and international companies in the
financial and compliance printing industries, including two principal U.S.-based
competitors, Bowne & Co., Inc. and R.R. Donnelley & Sons Company. Both Bowne and
Donnelley are major competitors in most of our financial and compliance printing
markets.
We also compete for complex, large-run typesetting work with a number of
other computer typesetting firms, and we compete for medium-run printing work
with a number of commercial web press printers.
In the Managed Communications Programs business, we believe our primary
competitors are local print shops and marketing service firms, including
advertising agencies, custom publication printers, direct mail firms, and
television, radio, newspapers, magazine and other media organizations. We also
compete with computer training organizations and computer retailers.
In our Document Management Services businesses, we compete with three
nationwide service companies -- Xerox Corporation, Pitney Bowes and IKON -- and
a number of smaller local companies. We also compete with litigation support
services vendors and a large number of photocopying and imaging shops, including
privately-owned shops as well as franchise operations. Competition in this part
of our business is intense and is based principally on service, price, speed,
accuracy, technological capability and established relationships.
We believe that Merrill competes favorably with its competitors.
EMPLOYEES
As of April 15, 1998, we had 3,626 full-time employees and 212 part-time
employees. None of our employees are covered by a collective bargaining
agreement. We consider our employee relations to be good.
Merrill's senior management and certain technical personnel have substantial
experience and expertise in the document services industry. We consider the
retention of these employees to be important to our continued success.
We compete intensely with others in the industry to attract and retain
qualified salespeople. However, we believe that we are able to provide
incentives sufficient to minimize the loss of key salespeople and to attract
productive new salespeople for both replacement and expansion of our sales team.
Many salespeople are under employment contracts of varying terms with us.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Substantially all of our revenue, operating profit and identifiable assets
are based in the United States.
ITEM 2. PROPERTIES
We lease all of our facilities, except two.
We own Merrill/May's main facility in St. Cloud that includes approximately
123,000 square feet.
We also own the Energy Park Business Center in St. Paul. This space consists
of approximately 150,000 square feet in two buildings adjacent to our principal
production and administrative office facility. We maintain several of our
corporate and administration departments in these buildings along with
reprographics operations. Substantially all of the approximately 85,000 square
feet of space remaining available for lease is currently leased to other
businesses. We believe that owning these buildings allows us to plan our
expansion more efficiently.
Our main office in St. Paul includes 47,000 square feet and is leased from
the Port Authority of the City of St. Paul. The terms of our agreements with the
Port Authority are in a facilities lease and land lease, both dated October 1,
1985, which require us to pay rent to the Port Authority in the amounts of
$24,069 per month and $3,431 per month, respectively, for terms expiring on
November 30, 2005. Each lease grants us the
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option to purchase the property at the end of the term. Under the facilities
lease, we may purchase the building for $254,500 and the land for $167,140 at
the end of the lease terms.
Our New York City service facility consists of approximately 102,000 square
feet of leased space on three floors of a building in Greenwich Village. We are
required to pay rent in the amount of $57,385 per month for a term expiring on
October 31, 2014.
We also lease service facilities, sales offices and warehouse space in other
cities, with space ranging from 150 square feet to 77,000 square feet. These
leases have expiration dates ranging from June 30, 1998 to October 31, 2018
under which we make monthly payments aggregating approximately $460,000,
including rental fees, real estate taxes and operating expenses.
We make a continuing effort to keep all of our properties and facilities
modern, efficient and adequate for our operating needs.
ITEM 3. LEGAL PROCEEDINGS
We do not know of any important legal, governmental, administrative or other
matters that would significantly affect Merrill's business or property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not ask our shareholders to vote on anything during the
fourth quarter of fiscal year 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Merrill, their ages, the year they became
executive officers and the offices held as of April 28, 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED
OR APPOINTED AS
AN
NAME AGE EXECUTIVE OFFICER TITLE
- ----------------------- --- ----------------- ------------------------------------------
<S> <C> <C> <C>
John W. Castro 49 1980 President and Chief Executive Officer
Rick R. Atterbury 44 1981 Executive Vice President
Steven J. Machov 47 1987 Vice President, General Counsel and
Secretary
Kathleen A. Larkin 38 1993 Vice President -- Human Resources
Kay A. Barber 47 1995 Vice President -- Finance, Chief Financial
Officer, Treasurer
</TABLE>
Our executive officers are elected by the Board of Directors. The
officers serve one-year terms that begin with their election at the
first meeting of the Board of Directors after the annual meeting of
shareholders. Their terms end at the same meeting the following year.
The President and Chief Executive Officer appoints other officers who
serve at his discretion. There are no family relationships between any
of the executive officers or directors. There has been no change in
position of any of the executive officers during the past five years,
except as we explain below:
Mr. Atterbury was elected Executive Vice President in 1996. He
previously served as Vice President -- Operations.
Mr. Machov was elected Vice President in May 1993 in addition to his
positions as General Counsel and Secretary.
Ms. Larkin joined Merrill in April 1993 as Manager of Human
Resources and was appointed Vice President -- Human Resources in
December 1993.
8
<PAGE>
Ms. Barber joined Merrill in August 1995 as Vice President --
Finance, Chief Financial Officer and Treasurer. From January 1993 to
August 1995, Ms. Barber was Vice President, Finance and Controller for
Growing Healthy, Inc., a frozen baby food company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Please refer to the section called "Quarterly Stock Price
Information" on page 12 of our 1998 Annual Report for additional
important information about Merrill's stock price. That information is
part of our disclosure in this Report. You should review this
information carefully. Merrill did not sell any unregistered equity
securities from February 1, 1997 through January 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The financial information in the table on page 27 of our 1998 Annual
Report should be reviewed. It is part of our disclosure in this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Please review the information under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" on pages 8 to 12 of our 1998 Annual Report. It is part of
our disclosure in this Report and analyzes our financial performance
over the last few years. You should review this information carefully.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company regularly invests excess operating cash in overnight
repurchase agreements that are subject to changes in short-term interest
rates. Accordingly, the Company believes that the market risk arising
from its holding of these financial instruments is minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our "Consolidated Financial Statements" on pages 13 to 26 (including
the unaudited information in the "Quarterly Data" section on page 26)
and the Report of Independent Accountants on page 28 of our 1998 Annual
Report are part of our disclosure in this Report. You should review this
information carefully.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were none.
9
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS OF THE REGISTRANT.
Please review the information under the captions "Election of Directors --
Information About Nominees" and "Other Information About Nominees" on pages 5
and 6 of our 1998 Proxy Statement. It is part of our disclosure in this Report.
You should review this information carefully.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning Merrill's Executive Officers is included in this
Report under Item 4A, "Executive Officers of the Registrant."
(c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" on page 16 of our 1998 Proxy Statement is part of our
disclosure in this Report. You should review this information carefully.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors -- Directors'
Compensation" on pages 7 and 8 and "Executive Compensation" on pages 8 to 16,
(excluding the "Comparative Stock Performance" graph on page 14), of our 1998
Proxy Statement is part of our disclosure in this Report. You should review this
information carefully.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions "Security Ownership of Certain Beneficial
Owners and Management" on pages 3 and 4, and "Election of Directors --
Information About Nominees" on page 5 of our 1998 Proxy Statement is part of our
disclosure in this Report. You should review this information carefully.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" on page 16 of our
1998 Proxy Statement is part of our disclosure in this Report. You should review
this information carefully.
10
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial statements:
The following financial statements are part of our disclosure in
this Report and are found on the following pages in our 1998 Annual
Report:
Consolidated Balance Sheets as of January 31, 1998 and 1997
-- page 13.
Consolidated Statements of Operations for the years ended
January 31, 1998, 1997 and 1996 -- page 14.
Consolidated Statements of Cash Flows for the years ended
January 31, 1998, 1997 and 1996 -- page 15.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended January 31, 1998, 1997 and 1996 -- page 16.
Notes to Consolidated Financial Statements -- pages 17-26.
Report of Independent Accountants -- page 28.
2. Financial statement schedule:
The following supplemental schedule and report of independent
accountants are part of our disclosure in this Report and should be
read together with the consolidated financial statements in the 1998
Annual Report we refer to above (page numbers refer to pages in this
Report):
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants................................................... 13
Supplemental Schedule:
II Valuation and Qualifying
Accounts........................................................................ 14
</TABLE>
We are omitting all other schedules either because the
information does not apply or the information is in the consolidated
financial statements or related notes.
3. Exhibits:
The exhibits to this Report are listed in the Exhibit Index on pages 16 to
19 of this Report.
If you were a shareholder on April 1, 1998, you may request copies of any of
these exhibits by writing to: Investor Relations, Merrill Corporation, One
Merrill Circle, St. Paul, Minnesota 55108. We may charge a small handling fee
for the copies.
The following is a list of each management contract or compensatory plan or
arrangement we need to file as an exhibit to this Report:
A. Employment Agreement between John W. Castro and the Company (this was
made part of our disclosure in Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 1989 (File No.
0-14082)).
11
<PAGE>
B. First Amendment to Employment Agreement between John W. Castro and the
Company (this was made part of our disclosure in Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended January
31, 1994 (File No. 0-14082)).
C. Second Amendment to Employment Agreement between John W. Castro and the
Company (this is included with this filing).
D. Deferred Compensation Agreement between John W. Castro and the Company
(this is included with this filing).
E. Employment Agreement between Rick R. Atterbury and the Company (this was
made part of our disclosure in Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1991 (File No.
0-14082)).
F. First Amendment to Employment Agreement between Rick R. Atterbury and
the Company (this was made part of our disclosure in Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended January
31, 1994 (File No. 0-14082)).
G. Second Amendment to Employment Agreement between Rick R. Atterbury and
the Company (this is included with this filing).
H. 1987 Omnibus Stock Plan, as amended (this was made part of our disclosure
in Exhibit 10.14 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1991 (File No. 0-14082)).
I. 1993 Stock Incentive Plan, as amended (this was made part of our
disclosure in Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1997 (File No. 0-14082)).
J. Option Agreement between Ronald N. Hoge and the Company (this was made
part of our disclosure in Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1993 (File No. 0-14082)).
K. 1996 Non-Employee Director Plan (this was made part of our disclosure in
Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1997 (File No. 0-14082)).
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year ended January 31, 1998.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Merrill Corporation
and Subsidiaries has been incorporated by reference in this Form 10-K from page
28 of the 1998 Annual Report to Shareholders of Merrill Corporation. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in Item 14(a)2. of this Form
10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
St. Paul, Minnesota
March 30, 1998
13
<PAGE>
SCHEDULE II
MERRILL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C
--------------------
COLUMN B ADDITIONS COLUMN D
---------- -------------------- ---------- COLUMN E
COLUMN A BALANCE AT CHARGED DEDUCTIONS -----------
- -------------------------------------------------- BEGINNING CHARGED TO OTHER FROM BALANCE AT
DESCRIPTION OF YEAR TO INCOME ACCOUNTS RESERVES END OF YEAR
- -------------------------------------------------- ---------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended January 31, 1996
Valuation account deducted from assets to which
it applies --
Allowance for doubtful accounts............... $2,830 $1,486 $ 26(A) $ 797(B) $3,545
---------- --------- --- ---------- -----------
---------- --------- --- ---------- -----------
Allowance for unbillable inventories.......... $ 312 $ 250 $ 562
---------- --------- -----------
---------- --------- -----------
Year Ended January 31, 1997
Valuation account deducted from assets to which
it applies --
Allowance for doubtful accounts............... $3,545 $2,861 $ 61(A) $ 440(B) $6,027
---------- --------- --- ---------- -----------
---------- --------- --- ---------- -----------
Allowance for unbillable inventories.......... $ 562 $2,678 $3,240
---------- --------- -----------
---------- --------- -----------
Year Ended January 31, 1998
Valuation account deducted from assets to which
it applies --
Allowance for doubtful accounts............... $6,027 $2,064 $ 55(A) $1,154(B) $6,992
---------- --------- --- ---------- -----------
---------- --------- --- ---------- -----------
Allowance for unbillable inventories.......... $3,240 $1,063(C) $2,177
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
- ------------------------
(A) Recoveries on accounts previously written off.
(B) Uncollectible accounts written off and adjustments to the allowance.
(C) Adjustments to the allowance account to reflect estimated net realizable
value at year-end.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
(REGISTRANT) MERRILL CORPORATION
BY (SIGNATURE) /s/ JOHN W. CASTRO
(NAME AND TITLE) John W. Castro, President and Chief Executive Officer
(DATE) April 30, 1998
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<S> <C>
BY (SIGNATURE) /s/ JOHN W. CASTRO
(NAME AND TITLE) John W. Castro, President and Chief Executive Officer
(Principal Executive Officer) and Director
(DATE) April 30, 1998
BY (SIGNATURE) /s/ KAY A. BARBER
(NAME AND TITLE) Kay A. Barber, Vice President -- Finance, Chief
Financial Officer and Treasurer (Principal Financial
and Accounting Officer)
(DATE) April 30, 1998
BY (SIGNATURE) /s/ ROBERT F. NIENHOUSE
(NAME AND TITLE) Robert F. Nienhouse, Director
(DATE) April 30, 1998
BY (SIGNATURE) /s/ RICHARD G. LAREAU
(NAME AND TITLE) Richard G. Lareau, Director
(DATE) April 30, 1998
BY (SIGNATURE) /s/ PAUL G. MILLER
(NAME AND TITLE) Paul G. Miller, Director
(DATE) April 30, 1998
BY (SIGNATURE) /s/ RICK R. ATTERBURY
(NAME AND TITLE) Rick R. Atterbury, Director
(DATE) April 30, 1998
BY (SIGNATURE) /s/ RONALD N. HOGE
(NAME AND TITLE) Ronald N. Hoge, Director
(DATE) April 30, 1998
BY (SIGNATURE) /s/ JAMES R. CAMPBELL
(NAME AND TITLE) James R. Campbell, Director
(DATE) April 30, 1998
BY (SIGNATURE) /s/ FREDERICK W. KANNER
(NAME AND TITLE) Frederick W. Kanner, Director
(DATE) April 30, 1998
BY (SIGNATURE) /s/ MICHAEL S. SCOTT MORTON
(NAME AND TITLE) Michael S. Scott Morton, Director
(DATE) April 30, 1998
</TABLE>
15
<PAGE>
MERRILL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
- ----------- -------------------------------------------------- --------------------------------------------------
<C> <S> <C>
3.1 Articles of Incorporation of the Company This was made part of our disclosure in Exhibit
3.1 to the Company's Registration Statement on
Form S-1 (File No. 33-4062)
3.2 Amendments to Articles of Incorporation as of June This was made part of our disclosure in Exhibit
20, 1986 and March 27, 1987 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1987
3.3 Restated Bylaws of the Company This was made part of our disclosure in Exhibit
3.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1990
10.1 Employment Agreement between Rick R. Atterbury and This was made part of our disclosure in Exhibit
the Company, dated as of February 1, 1987, as 10.2 to the Company's Annual Report on Form 10-K
amended for the fiscal year ended January 31, 1991
10.2 First Amendment to Employment Agreement between This was made part of our disclosure in Exhibit
Rick R. Atterbury and the Company, dated as of 10.3 to the Company's Annual Report on Form 10-K
April 29, 1994. for the fiscal year ended January 31, 1994
10.3 Second Amendment to Employment Agreement between Included with this filing electronically
Rick R. Atterbury and the Company, dated as of
April 8, 1998.
10.4 Facilities Lease dated October 1, 1985 between the This was made part of our disclosure in Exhibit
Port Authority of the City of Saint Paul as 10.17 to the Company's Registration Statement on
lessor and the Company as lessee Form S-1 (File No. 33-4062)
10.5 Land Lease dated October 1, 1985 between the Port This was made part of our disclosure in Exhibit
Authority of the City of Saint Paul as lessor and 10.18 to the Company's Registration Statement on
the Company as lessee Form S-1 (File No. 33-4062)
10.6 Credit Agreement dated as of November 25, 1996 This was made part of our disclosure in Exhibit
among First Bank, N.A., as Agent and as a Bank, 10.2 to the Company's Quarterly Report on Form
Norwest Bank Minnesota, N.A., and the Company. 10-Q for the fiscal quarter ended October 31,
1996
10.7 Note Purchase Agreement, dated as of October 25, This was made part of our disclosure in Exhibit
1996 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended October 31,
1996
10.8 1987 Omnibus Stock Plan, as amended This was made part of our disclosure in Exhibit
10.14 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1991
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
- ----------- -------------------------------------------------- --------------------------------------------------
10.9 Employment Agreement between John W. Castro and This was made part of our disclosure in Exhibit 10
the Company dated as of February 1, 1989 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 1989
<C> <S> <C>
10.10 Amendment to Employment Agreement between John W. This was made part of our disclosure in Exhibit
Castro and the Company dated as of April 29, 10.9 to the Company's Annual Report on Form 10-K
1994. for the fiscal year ended January 31, 1994
10.11 Second Amendment to Employment Agreement between Included with this filing electronically
John W. Castro and the Company, dated as of April
8, 1998.
10.12 Deferred Compensation Plan for John W. Castro, Included with this filing electronically
dated as of March 30, 1998.
10.13 1993 Incentive Stock Plan, as amended This was made part of our disclosure in Exhibit
10.11 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1997
10.14 Option Agreement dated as of July 1, 1991 between This was made part of our disclosure in Exhibit
Ronald N. Hoge and the Company 10.9 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993
10.15 Asset Purchase Agreement, dated as of December 31, This was made part of our disclosure in Exhibit
1993 among the Company, Merrill Acquisition 2.1 to the Company's Current Report on Form 8-K
Corporation, May Printing Company and dated December 31, 1993.
Shareholders of May Printing Company.
10.16 Loan Agreement, dated as of July 1, 1990 between This was made part of our disclosure in Exhibit
May Printing Company and Minnesota Agricultural 10.13 to the Company's Annual Report on Form 10-K
and Economic Development Board, amended as of for the fiscal year ended January 31, 1994
December 31, 1993.
10.17 Guaranty of Loan Obligations of May Printing This was made part of our disclosure in Exhibit
Company by the Company in favor of Minnesota 10.14 to the Company's Annual Report on Form 10-K
Agricultural and Economic Development Board, for the fiscal year ended January 31, 1994
dated as of December 31, 1993.
10.18 Guaranty Agreement of the obligations of Merrill This was made part of our disclosure in Exhibit
Acquisition Corporation by the Company in favor 10.15 to the Company's Annual Report on Form 10-K
of May Printing Company, and Thomas May and James for the fiscal year ended January 31, 1994
Scott May, dated as of December 31, 1993.
10.19 Stock Purchase Agreement, dated March 28, 1996, by This was made part of our disclosure in Exhibit
and among the Company and the Shareholders of FMC 2.1 to the Company's Current Report on Form 8-K
Resource Management Corporation dated April 15, 1996
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
- ----------- -------------------------------------------------- --------------------------------------------------
10.20 Asset Purchase Agreement, dated April 15, 1996, by This was made part of our disclosure in Exhibit
and among the Company, Merrill/New York Company 10.22 to the Company's Annual Report on Form 10-K
and The Corporate Printing Company, Inc., CPC for the fiscal year ended January 31, 1996.
Communications, Inc., CPC Reprographics, Inc.,
The Corporate Printing Company International,
Ltd., CP International Holdings, Inc., CPC
Management Services, Inc., The Corporate Printing
Company International SNC, The Corporate Printing
Company International PTE Ltd., Oakland
Composition Limited Partnership, and the
Shareholders of the above Affiliated Companies.
(Omitted from this Agreement, as filed, are the
exhibits listed in the List of Exhibits included
at the beginning of the Agreement. The Company
will furnish supplementally a copy of any such
omitted exhibits to the Commission upon request.)
<C> <S> <C>
10.21 1996 Non-Employee Director Plan This was made part of our disclosure in Exhibit
10.19 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1997.
10.22 Lease dated as of May 1, 1994 between The Rector, This was made part of our disclosure in Exhibit
Church-Wardens, and Vestrymen of Trinity Church 10.20 to the Company's Annual Report on Form 10-K
in the City of New York, as landlord and The for the fiscal year ended January 31, 1997.
Corporate Printing Company, Inc, as lessee,
assignor to Merrill/New York Company. (Omitted
from this Lease, as filed, are the floor plan
exhibits listed in the Exhibits and Other
Attachments included at the beginning of the
Agreement. The Company will furnish
supplementally a copy of any such omitted
exhibits to the Commission upon request.)
13.1 Portions of Annual Report to Shareholders Included with this filing electronically
21.1 Subsidiaries of the Company Included with this filing electronically
23.1 Consent of Independent Accountants Included with this filing electronically
27.1 Financial Data Schedule for the year ended January Included with this filing electronically
31, 1998
27.2 Restated Financial Data Schedule for the quarter Included with this filing electronically
ending October 31, 1997
27.3 Restated Financial Data Schedule for the quarter Included with this filing electronically
ending July 31, 1997
27.4 Restated Financial Data Schedule for the quarter Included with this filing electronically
ending April 30, 1997
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
- ----------- -------------------------------------------------- --------------------------------------------------
27.5 Restated Financial Data Schedule for the year Included with this filing electronically
ending January 31, 1997
<C> <S> <C>
27.6 Restated Financial Data Schedule for the quarter Included with this filing electronically
ending October 31, 1996
27.7 Restated Financial Data Schedule for the quarter Included with this filing electronically
ending July 31, 1996
27.8 Restated Financial Data Schedule for the quarter Included with this filing electronically
ending April 30, 1996
27.9 Restated Financial Data Schedule for the year Included with this filing electronically
ending January 31, 1996
</TABLE>
19
<PAGE>
SECOND AMENDMENT TO
EMPLOYMENT AGREEMENT
This Amendment to the Employment Agreement (the "Amendment"), dated as
of April 8, 1998, is between Merrill Corporation, a Minnesota corporation
(the "Company"), and Rick R. Atterbury (the "Executive").
A. The Company and the Executive entered into an Employment Agreement
pursuant to which the Company employs the Executive, dated as of February 1,
1987 as amended as of April 29, 1994 (the "Employment Agreement").
B. Company and the Executive desire to further amend the Employment
Agreement.
Accordingly, the parties hereto, intending to be legally bound, agree as
follows:
1. SECTION 3.1 (a) AND (b). Paragraphs (a) and (b) of Section 3.1 of
the Employment Agreement are amended in their entirety to read as follows:
(b) ANNUAL SALARY: Effective beginning April 15, 1998, an annual salary
at the rate of $275,000 per annum, payable in equal semi-monthly
installments.
(c) ADDITIONAL COMPENSATION: Effective for any bonus payable after
February 1,1998, an annual bonus for each fiscal year equal to: (i)
$2,400.00 for each one cent of the Company's net income per share for
such year up to and including the net income per share for the prior
fiscal year, plus (ii) $6,000.00 for each one cent of the Company's net
income per share for such year in excess of the net income per share for
the prior fiscal year; which annual bonus shall be payable on or before
75 days after the close of each fiscal year.
2. NO OTHER AMENDMENTS. Except as amended pursuant to this Amendment
the Employment Agreement shall remain in full force and effect in accordance
with its original terms.
The Company and the Executive have caused this Amendment to be duly
executed as of the date first above written.
MERRILL CORPORATION
/s/ Rick R. Atterbury By /s/ Kathleen A. Larkin
- ---------------------------------- -----------------------------------
Rick R. Atterbury Its Vice President-Human Resources
-----------------------------------
<PAGE>
SECOND AMENDMENT TO
EMPLOYMENT AGREEMENT
This Amendment to the Employment Agreement (the "Amendment"), dated as of
April 8, 1998, is between Merrill Corporation, a Minnesota corporation (the
"Company"), and John W. Castro (the "Executive").
A. The Company and the Executive entered into an Employment Agreement
pursuant to which the Company employs the Executive, dated as of February 1,
1989 as amended as of April 29, 1994 (the "Employment Agreement").
B. Company and the Executive desire to further amend the Employment
Agreement.
Accordingly, the parties hereto, intending to be legally bound, agree as
follows:
1. SECTION 3.1 (a) AND (b). Paragraphs (a) and (b) of Section 3.1 of the
Employment Agreement are amended in their entirety to read as follows:
(a) ANNUAL SALARY: Effective beginning April 15, 1998, an annual salary at
the rate of $375,000 per annum, payable in equal semi-monthly
installments.
(b) ADDITIONAL COMPENSATION: Effective for any bonus payable after
February 1,1998, an annual bonus for each fiscal year equal to:
(i) $ 4,000.00 for each one cent of the Company's net income per share for
such year up to and including the net income per share for the prior fiscal
year, plus (ii) $ 10,000.00 for each one cent of the Company's net income
per share for such year in excess of the net income per share for the prior
fiscal year; which annual bonus shall be payable on or before 75 days after
the close of each fiscal year.
2. NO OTHER AMENDMENTS. Except as amended pursuant to this Amendment the
Employment Agreement shall remain in full force and effect in accordance with
its original terms.
The Company and the Executive have caused this Amendment to be duly
executed as of the date first above written.
MERRILL CORPORATION
/s/ John W. Castro By /s/ Kathleen A. Larkin
- ---------------------------------- -----------------------------------
John W. Castro Its Vice President-Human Resources
-----------------------------------
<PAGE>
EXHIBIT 10.12
DEFERRED COMPENSATION AGREEMENT
This Deferred Compensation Agreement is entered into this 30th day of March,
1998, by and between MERRILL CORPORATION, a Minnesota corporation located at
One Merrill Circle, St. Paul, Minnesota (the "Company") and JOHN W. CASTRO,
an individual residing at 3825 Bridgewater Drive, Eagan, Minnesota (the
"Executive").
RECITALS
FIRST: The Executive is an employee of the Company.
SECOND: The Executive and the Company have entered into an Employment
Agreement.
THIRD: The Employment Agreement provides that the Company will pay the
Executive a Bonus.
FOURTH: The Company and the Executive wish to provide for the automatic
deferral of any portion of the Bonus that would cause the Executive's
compensation for any fiscal year of the Company not to be deductible for the
fiscal year pursuant to Code section 162(m).
NOW, THEREFORE, the Company and the Executive agree as follows:
ARTICLE
1.
DEFINITIONS, CONSTRUCTION AND INTERPRETATION
The definitions and rules of construction and interpretation set forth in
this article apply in construing this Agreement unless the context otherwise
indicates.
1.1. ACCOUNT. "Account" means the bookkeeping account maintained with
respect to the Executive pursuant to Section 2.1.
1.2. AGREEMENT. "Agreement" means this Deferred Compensation Agreement as
it may be amended from time to time.
1.3. BONUS. "Bonus" means the annual cash bonus to which Executive is
entitled pursuant to the Employment Agreement.
1.4. BENEFICIARY. "Beneficiary" is the person designated or otherwise
determined under the provisions of Section 3.5 as the distributee of
benefits payable after the Executive's death.
1.5. CHANGE IN CONTROL. "Change in Control" means a change in control of
the Company within the meaning of the Employment Agreement.
1.6. CODE. "Code" means the Internal Revenue Code of 1986, as amended.
Any reference to a specific provision of the Code includes a reference
to that provision as it may be amended from time to time and to any
successor provision.
1.7. COMPANY. "Company" means Merrill Corporation or any successor thereto.
<PAGE>
1.8. CROSS REFERENCES. References within a section of this Agreement to a
particular subsection refer to that subsection within the same section
and references within a section or subsection to a particular clause
refer to that clause within the same section or subsection, as the
case may be.
1.9. EMPLOYMENT AGREEMENT. "Employment Agreement" means the Employment
Agreement made as of February 1, 1989 between the Company and the
Executive, as amended by the Amendment to Employment Agreement dated
as of April 29, 1994, and as it may be further amended from time to
time.
1.10. EXECUTIVE. "Executive" means John W. Castro.
1.11. GOVERNING LAW. To the extent that state law is not preempted by the
provisions of the Employee Retirement Income Security Act of 1974, as
amended, or any other laws of the United States, all questions arising
in connection with this Agreement, including, without limitation,
those pertaining to construction, validity, effect, enforcement and
remedies, will be determined in accordance with the internal,
substantive laws of the State of Minnesota without regard to the
conflict of laws rules of the State of Minnesota or any other
jurisdiction.
1.12. HEADINGS. The headings of articles and sections are included solely
for convenience of reference; if there exists any conflict between
such headings and the text of this Agreement, the text will control.
1.13. TERMINATION OF EMPLOYMENT. "Termination of Employment" means (a) a
complete termination of the employment relationship between the
Company and the Executive as determined in accordance with generally
applicable Company policies as in effect from time to time or (b) an
absence from active employment with the Company due to accident,
injury or illness if and when the Executive becomes entitled to
receive benefits under the Company's long-term disability plan in
connection with the absence. For purposes of determining whether the
Executive has experienced a Termination of Employment, the term
"Company" includes all entities, whether or not incorporated, that
together with the Company are treated as a single employer pursuant to
Code sections 414(b) and (c).
1.14. TRUST. "Trust" means the trust established pursuant to Section 4.1 of
this Agreement, as it may be amended from time to time.
1.15. TRUSTEE. "Trustee" means the one or more banks or trust companies
that at the relevant time has or have been appointed by the Company to
act as Trustee of the Trust.
ARTICLE
2.
BENEFITS
2.1. ACCOUNT. The Company will establish and maintain an Account for the
Executive to evidence amounts credited pursuant to Sections 2.2 and
2.3.
2.2. DEFERRAL CREDITS.
(A) If payment of the Bonus for any fiscal year of the Company in
accordance with the terms of the Employment Agreement would cause
any portion of the Executive's compensation to not be deductible
by the Company for the fiscal year pursuant to Code section
162(m), the amount of the Bonus that would otherwise be paid to
the Executive
2
<PAGE>
in accordance with the terms of the Employment Agreement will be
reduced until no portion of the Executive's compensation is not
deductible pursuant to Code section 162(m) and the amount of the
reduction will be deferred pursuant to this Agreement.
(B) The amount of any deferral pursuant to this Section 2.2 will be
credited to the Executive's Account as of the date on which the
Executive would have otherwise received the Bonus with respect to
which such credit relates.
2.3. EARNINGS. As of the last day of each month, the Administrator will
adjust the Account by multiplying the average daily balance of the
Account for the month by the decimal equivalent of the percentage
increase or decrease in the Standard & Poors 500 index for the month,
determined by comparing the value of the index on the first business
day of the month to the value of the index on the last business day of
the month. The Company and the Executive may from time to time agree
to an alternative methodology for calculating earnings. The agreement
must be in writing and signed by the Company and the Executive.
2.4. VESTING. The Executive always has a fully vested nonforfeitable
interest in his Account.
ARTICLE
3.
DISTRIBUTION
3.1. DISTRIBUTION BEFORE TERMINATION OF EMPLOYMENT. Prior to the
Executive's Termination of Employment, if, taking into account all
other compensation that the Executive has or will receive for a fiscal
year of the Company, the Company determines that the Executive may
receive additional compensation without exceeding the maximum amount
deductible by the Company for the fiscal year pursuant to Code section
162(m), not later than the last day of the fiscal year distribution of
the Executive's Account will be made, in the form of a single lump sum
payment, in an amount equal to the lesser of (a) the balance of the
Account and (b) the amount of additional compensation that the
Executive may receive for the fiscal year without exceeding the
maximum amount deductible by the Company for the fiscal year pursuant
to Code section 162(m).
3.2. DISTRIBUTION AFTER TERMINATION OF EMPLOYMENT.
(A) Distribution of the Executive's Account after his Termination of
Employment will be made or begin, as the case may be, as soon as
administratively practicable after the fifteenth day of the third
month following the last day of the Company's fiscal year that
includes the Executive's Termination of Employment.
(B) The balance of the Executive's Account will be distributed to the
Executive after his Termination of Employment in the form of a
single lump sum payment, unless (1) the Executive makes an
irrevocable written election, on a form provided by the Company,
to receive his distribution in the form of annual installment
payments for either five or ten years and (2) the date of his
Termination of Employment is at least two years after the date on
which the written election is provided to the Company.
(C) The balance of the Executive's Account will be distributed to his
Beneficiary as soon as administratively practicable after the
Executive's death in the form of a single lump sum payment.
3
<PAGE>
(D) If the distribution is made in the form of a lump sum payment,
the amount of the payment will be equal to the balance of the
Executive's Account as of the last day of the month immediately
preceding the distribution.
(E) If the distribution is made in the form of installment payments,
the undistributed portion of the Account balance will continue to
be credited with earnings pursuant to Section 2.3. The first
annual payment will be made on a date determined in accordance
with Subsection A and subsequent annual payments will be made on
or around the same date in each of the following four or nine
years, as the case may be. The amount of the payment each year
will be determined by dividing the Account balance as of the last
day of the month immediately preceding the payment date by the
total number of remaining payments (including the payment in
question).
3.3. SPECIAL RULES.
(A) ACCELERATED DISTRIBUTION. Notwithstanding Sections 3.1 and 3.2,
subject to Section 3.3(C) the Executive may elect an immediate
distribution in an amount equal to 90 percent of the amount of
the lump sum distribution to which he would then be entitled
pursuant to Section 3.2(C) and the remaining 10 percent of his
Account balance will be permanently forfeited. The distribution
will be made in the form of a lump sum payment within the 10-day
period following the receipt by the Company of the Executive's
written request for the distribution.
(B) UNFORESEEABLE EMERGENCY. Notwithstanding Sections 3.1 and 3.2,
subject to Section 3.3(C) a distribution will be made to the
Executive if the Company determines that he has experienced an
"unforeseeable emergency." The amount of the distribution may
not exceed the lesser of (1) the amount necessary to satisfy the
emergency, as determined by the Company or (2) the amount of the
lump sum distribution to which he would then be entitled pursuant
to Section 3.2(D). The distribution will be made in the form of
a lump sum payment within the 10-day period following the
Company's determination that the Executive has experienced an
unforeseeable emergency. For purposes of this section, an
"unforeseeable emergency" is an unanticipated emergency that is
caused by an event beyond the control of the Executive and that
would result in severe financial hardship to the Executive if the
hardship withdrawal was not permitted.
(C) NONDEDUCTIBILITY.
(1) If the Company determines in good faith prior to a Change in
Control that there is a reasonable likelihood that any
compensation paid to the Executive for a taxable year of the
Company would not be deductible by the Company solely by
reason of the limitation under Code section 162(m), solely
to the extent deemed necessary by the Company to ensure that
the entire amount of any distribution to the Executive
pursuant to this Section 3.3 prior to the Change in Control
is deductible, the Company may defer all or any portion of
the distribution. Any amounts deferred pursuant to this
subsection will continue to be credited with earnings in
accordance with Section 2.3. The deferred amounts and
earnings thereon will be distributed to the Executive or to
his Beneficiary in the case of his death at the earliest
possible date, as determined by the Company in good faith,
on which the deductibility of compensation paid or payable
to the Executive for the taxable year of the Company during
which the distribution is
4
<PAGE>
made will not be limited by Code section 162(m) or, if
earlier, the effective date of a Change in Control.
(2) In lieu of a deferral of a distribution pursuant to
Subsection (A), the Executive may make a written election to
receive the distribution and reimburse the Company for the
value of the deduction lost by operation of Code section
162(m) as a result of the distribution, as determined by the
Company. The Company's good faith determination based on
assumptions determined by the Company to be reasonable will
be final and binding on the Company and the Executive and no
adjustments will be made to reflect differences between
assumptions and actual facts and circumstances. The amount
of any reimbursement pursuant to this Subsection (B) in
connection with a distribution pursuant to Subsection (A)
will reduce, dollar for dollar, the amount of any forfeiture
pursuant to Subsection (A). The Company may subtract the
amount of any reimbursement due to the Company pursuant to
this Subsection (B) from the amount of any distribution
pursuant to this Agreement.
3.4. DISTRIBUTION REDUCES ACCOUNT BALANCE. The balance of the Account will
be reduced as of the date of any distribution by the gross amount of
the distribution.
3.5. BENEFICIARY DESIGNATION.
(A) Executive may designate, on a form furnished by the Company, one
or more primary Beneficiaries or alternative Beneficiaries to
receive all or a specified part of his Account after his death,
and the Executive may change or revoke any such designation from
time to time. No such designation, change or revocation is
effective unless executed by the Executive and received by the
Company during the Executive's lifetime. If the Executive is
married, his spouse must consent to any designation, change or
revocation which would result in any person other than the spouse
being the Executive's primary Beneficiary. The consent must be
in writing, signed by the spouse and witnessed by a notary
public. The consent relates only to the specific Beneficiary or
class of Beneficiaries designated and the spouse may not
subsequently revoke the consent with respect to that Beneficiary
or class of Beneficiaries unless the Executive makes a new
designation. No change or revocation requires the consent of any
person other than the Executive's spouse.
(B) If the Executive -
(1) fails to designate a Beneficiary, or
(2) revokes a Beneficiary designation without naming another
Beneficiary, or
(3) designates one or more Beneficiaries none of whom survives
the Executive,
for all or any portion of his Account, such Account or portion
will be payable to the Executive's surviving spouse or, if the
Executive is not survived by a spouse, to the representative of
the Executive's estate.
(C) The automatic Beneficiaries specified above and, unless the
designation otherwise specifies, the Beneficiaries designated by
the Executive, become fixed as of the Executive's death so that,
if a Beneficiary survives the Executive but dies before the
5
<PAGE>
receipt of the payment due such Beneficiary, payment will be made
to the representative of such Beneficiary's estate. Any
designation of a Beneficiary by name that is accompanied by a
description of relationship or only by statement of relationship
to the Executive is effective only to designate the person or
persons standing in such relationship to the Executive at the
Executive's death.
3.6. PAYMENT IN EVENT OF INCAPACITY. If the Executive or any Beneficiary
entitled to receive a payment under this Agreement is, in the judgment
of the Company, physically, mentally or legally incapable of receiving
or acknowledging receipt of the payment, and no legal representative
has been appointed for the individual, the Company may (but is not
required to) cause the payment to be made to any one or more of the
following as may be chosen by the Company: the Beneficiary (in the
case of the incapacity of the Executive); the institution maintaining
the Executive or Beneficiary; a custodian under the Uniform Transfers
to Minors Act of any state (in the case of the incapacity of a
Beneficiary); or the Executive's or Beneficiary's spouse, children,
parents or other relatives by blood or marriage. The Company is not
required to see to the proper application of any payment so made, and
any such payment completely discharges all claims under this Agreement
against the Company to the extent of the payment.
ARTICLE
4.
ESTABLISHMENT OF TRUST; NATURE OF EXECUTIVE'S INTEREST
4.1. ESTABLISHMENT OF TRUST.
(A) The Company may choose to provide benefits through a Trust with
an independent corporate trustee. The Trust must (1) be a grantor
trust with respect to which the Company is treated as grantor,
(2) not cause the benefits under this Agreement to be funded for
federal income tax purposes or for purposes of the Employee
Retirement Income Security Act of 1974, as amended, and (3)
provide that Trust assets will, upon the Company's insolvency, be
used to satisfy claims of the Company's general creditors. The
Company may from time to time transfer to the Trust cash,
marketable securities or other property acceptable to the Trustee
in accordance with the terms of the Trust.
(B) Notwithstanding Subsection (A), not later than the effective date
of a Change in Control, the Company must transfer to the Trust an
amount not less than the amount by which (1) 125 percent of the
balance of the Account as of the last day of the month
immediately preceding the effective date of the Change in Control
exceeds (2) the value of the Trust assets attributable to the
Agreement.
4.2. SOURCE OF PAYMENTS. The Company may make payment of benefits directly
to the Executive or his Beneficiary as they become due under the terms
of this Agreement or may direct the Trustee to make such payments. If
the Trust assets are not sufficient to make payments of benefits in
accordance with the terms of this Agreement, the Company will make the
balance of each such payment as it falls due.
4.3. NATURE OF EXECUTIVE'S INTEREST. Nothing contained in the Agreement is
to be construed as providing for assets to be held for the benefit of
the Executive or any other person or persons to whom benefits are to
be paid pursuant to the terms of this Agreement, the Executive's only
interest under the Agreement being the right to receive the benefits
set forth herein. The Trust is established only for the convenience
of the Company and the Executive, and the Executive has
6
<PAGE>
no interest in the assets of the Trust prior to their distribution
pursuant to the Agreement. To the extent the Executive or any other
person acquires a right to receive benefits under this Agreement or
the Trust, such right is no greater than the right of any unsecured
general creditor of the Company.
ARTICLE
5.
MISCELLANEOUS
5.1. DETERMINATION OF BENEFITS. The Company will make all determinations
as to rights to benefits under this Agreement. Subject to and in
compliance with the specific procedures contained in the applicable
regulations under the Employee Retirement Income Security Act of 1974,
as amended.
(A) Any decision by the Company denying a claim by the Executive or
his Beneficiary for benefits under this Agreement will be stated
in writing and delivered or mailed to the Executive or such
Beneficiary.
(B) Each such notice will set forth the specific reasons for the
denial.
(C) The Company will afford a reasonable opportunity to the Executive
or Beneficiary for a full and fair review of the decision denying
such claim.
5.2. ADMINISTRATION.
(A) Prior to a Change in Control, the Company's Board of Directors
has discretionary power and authority to interpret, construe,
apply, enforce and otherwise administer this Agreement and to act
on behalf of the Company. The Board of Directors may delegate
such power and authority to any individual or committee. Any
action taken by the Board of Directors or the Board of Directors'
delegate in good faith is binding and conclusive upon all parties
in interest and neither the Board of Directors nor any such
delegate will be liable to any person for any action taken or
omitted to be taken in connection with the interpretation,
construction, application, enforcement or other administration of
this Agreement, so long as such action or omission to act be made
in good faith.
(B) After a Change in Control, the Board of Directors of the Company
will interpret, construe, apply, enforce and administer this
Agreement on behalf of the Company and, other than with respect
to ministerial acts, the Board's duties are not delegable.
5.3. STATEMENTS. The Company will provide the Executive, or his
Beneficiary after the Executive's death, with written statements,
indicating the balance of the Account as of each January 31 (a
"statement date") until the Account has been distributed in full. The
statement will indicate the balance of the Account as of the last
statement date, deferrals credited to the Account since the last
statement date pursuant to Section 2.2, earnings credited to the
Account since the last statement date pursuant to Section 2.3 and the
balance of the Account as of the current statement date. If the
Executive or Beneficiary fails to object to the balance reflected on
the statement within 90 days after receipt, the balance will be
presumed to be correct and the Executive or Beneficiary may not
thereafter object to the balance or the computation thereof.
Statements will be provided within 30 days after the statement date.
7
<PAGE>
5.4. AMENDMENT. This Agreement may not be amended, altered or modified,
except by a written instrument signed on behalf of the Company by the
Chair of the Compensation Committee of the Company's Board of
Directors and the Executive, or their respective successors.
5.5. INUREMENT. This Agreement is binding upon and inures to the benefit
of the Company and its successors and assigns, and the Executive, his
successors, heirs, executors, administrators and Beneficiaries.
5.6. NON-ASSIGNABILITY OF BENEFITS. The benefits payable under this
Agreement and the right to receive future benefits may not be
anticipated, alienated, sold, transferred, assigned, pledged,
encumbered, or subjected to any charge or legal process.
5.7. WITHHOLDING AND OFFSETS. The Company and the Trustee retain the right
to withhold from any benefit payment under this Agreement and from any
other wages payable to the Executive, any and all income, employment,
excise and other tax as the Company or Trustee deems necessary and,
prior to a Change in Control, the Company may offset against amounts
payable to the Executive or Beneficiary any amounts then owing to the
Company by the Executive or Beneficiary.
5.8. NO EMPLOYMENT RIGHTS. Nothing in this Agreement either (a) confers on
the Executive any right to continued employment with the Company,
employment with the Company in any particular position or Bonus
payments in any particular amount or (b) alters, impairs or modifies
any such right arising under the Employment Agreement.
5.9. DISPUTES.
(A) The Company and the Executive agree that any dispute regarding
this Agreement that they are unable to resolve to their mutual
satisfaction by negotiation will be resolved exclusively by
arbitration, by a panel of three arbitrators, in accordance with
the Commercial Arbitration Rules of the American Arbitration
Association then in effect. Any arbitration proceeding that
commences before a Change in Control will be held in St. Paul,
Minnesota. Any arbitration proceeding that commences after a
Change in Control will be held in a location within the
continental United States specified by the Executive.
(B) In connection with any dispute arising before a Change in
Control, the Executive or Beneficiary is responsible for paying
any costs he or she incurs, including attorney's fees and legal
expenses, and the Company is responsible for paying any costs it
incurs, including attorney's fees and legal expenses. In
connection with any dispute arising after a Change in Control,
the Company is responsible for paying all costs of both parties,
including attorney's fees and expenses.
5.10. NO WAIVER. The waiver by either of the parties, express or implied,
of any right under this Agreement or any failure to perform under this
Agreement by the other party does not constitute a waiver of any other
right under this Agreement or of any other failure to perform under
this Agreement by the other party.
5.11. OTHER BENEFITS.
(A) Except to the extent otherwise expressly provided under a
specific benefit plan, practice, policy or procedure of the
Company, neither amounts deferred pursuant to Section 2.2
8
<PAGE>
nor amounts paid to the Executive pursuant to Article 3
constitute salary or compensation to the Executive for the purpose
of computing benefits to which he may be entitled thereunder.
(B) Amounts deferred pursuant to Section 2.2 will be considered
"excess pensionable earnings" for purposes of the Merrill
Corporation Supplemental Executive Retirement Plan for the plan
year during which the amounts would have been paid to the
Executive but for the deferral.
(C) Deferrals pursuant to this Agreement will be made after any
deferral of the Bonus pursuant to the Merrill Corporation Income
Deferral Plan.
5.12. NO WARRANTIES REGARDING TAX TREATMENT. The Executive acknowledges
that he has consulted independent counsel whose input has been
incorporated in structuring this Agreement. The Company makes no
warranties regarding the tax treatment to the Executive of any
deferrals or payments made pursuant to this Agreement and the
Executive will hold the Company and its officers, directors,
employees, agents and advisors harmless from any liability resulting
from any tax position taken by the Company in good faith in connection
with this Agreement.
5.13. NOTICE. All notices, requests, elections, demands and all other
communications required or permitted by either party to the other
party by this Agreement must be in writing and will be deemed to have
been duly given when delivered personally or received by certified or
registered mail, return receipt requested, postage prepaid, at the
address of the other party, as follows:
If to the Company, to:
Merrill Corporation
Energy Park
1 Merrill Circle
St. Paul, MN 55108
Attention: Chair of the Compensation Committee of
the Board of Directors
with a copy to the General Counsel
If to Executive, to:
John W. Castro
3825 Bridgewater Drive
Eagan, MN 55123
Either party hereto may change its address for purposes of this
section by giving 15 days' prior notice to the other party.
5.14. SEVERABILITY. If any term or provision of this Agreement or the
application hereof to any person or circumstance is to any extent
invalid or unenforceable, the remainder of this Agreement or the
application of such term or provision to persons or circumstances
other than those as to which it is held invalid or unenforceable will
not be affected thereby, and each term and provision of this Agreement
will be valid and enforceable to the fullest extent permitted by law.
9
<PAGE>
5.15. COUNTERPARTS. This Agreement may be executed in several counterparts
each of which will be deemed to be an original copy, and all of which
together constitute one agreement binding on the Company and the
Executive.
To acknowledge and affirm their respective rights and obligations, the
Company and the Participant have signed this Agreement as of the date first
above written.
EXECUTIVE MERRILL CORPORATION
/s/ Kathleen A. Larkin,
/s/ John W. Castro Vice President-Human Resources
- ---------------------------- ------------------------------
March 30, 1998 March 30, 1998
10
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EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute FORWARD-LOOKING statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such FORWARD-LOOKING statements involve known and unknown risks,
uncertainties or achievements of the Company which may cause actual results
to be materially different from any future results, performance or
achievements expressed or implied by such FORWARD-LOOKING statements. These
risks and uncertainties include, but are not limited to, the effect of
economic and financial market conditions, government public reporting
regulations, paper costs and the integration and performance of recent
acquisitions.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentage
relationship to revenues of certain items in the Company's consolidated
statements of operations and the percentage changes in the dollar amounts of
such items in comparison to the prior years.
<TABLE>
<CAPTION>
For the Years Ended January 31,
--------------------------------------------------
% Increase (Decrease)
---------------------
Percentage of Revenues 1998 1997
--------------------------- VS. vs.
1998 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Financial 38.2% 40.6% 36.1% 22% 62%
Corporate 31.6 27.6 29.5 49 35
Document management services 11.7 11.2 12.9 35 26
Commercial and other 18.5 20.6 21.5 17 38
- --------------------------------------------------------------------------
100.0 100.0 100.0 30 44
Cost of revenues 64.3% 64.3% 67.6% 30% 37%
Gross profit 35.7 35.7 32.4 30 59
Selling, general and administrative expenses 24.8 25.4 24.5 27 50
Operating income 10.9 10.3 7.9 37 87
Interest expense (0.9) (1.2) (0.4) 5 275
Other income, net 0.1 0.1 0.1 217 (23)
Income before provision for income taxes 10.1 9.2 7.6 43 74
Provision for income taxes 4.4 4.1 3.3 40 82
Net income 5.7 5.1 4.3 46 67
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
8 1998 ANNUAL REPORT
<PAGE>
BUSINESS Merrill Corporation is engaged in one line of business--providing
paper and electronic document services. The Company divides its revenues into
four categories of service: financial, corporate, document management
services, and commercial and other. The percentage of revenues attributable
to each category of service is set forth in the chart below. Revenues in the
financial category generally reflect the level of transactional activity in
the capital markets. Financial encompasses many types of transactions, and
some types of transactions tend to increase when others are out of favor.
However, a prolonged reduction in the overall level of financial transactions
could be expected to have a negative impact on this category. The corporate
revenues category encompasses required regulatory compliance and mutual fund
documentation and other repetitive work, and is typically not significantly
affected by capital market fluctuations. Revenues in the document management
services and commercial and other categories tend to follow general economic
trends.
FISCAL YEAR 1998 VS. FISCAL YEAR 1997 Revenues for fiscal year 1998
increased 30 percent over the previous year. Financial revenues increased 22
percent compared to last year. This increase was driven by continued strong
mergers and acquisition transaction activity in financial markets throughout
fiscal year 1998. The increase was also driven by the results of the
Corporate Printing Company (CPC) business acquired in April 1996.
International revenues, which are included in the financial revenue category,
represented less than 10 percent of consolidated revenues and increased over
fiscal year 1997 revenues. Management does not anticipate significant
fluctuations in international revenues as a percentage of total revenues
during fiscal year 1999. Corporate revenues increased 49 percent when
compared to fiscal year 1997. This increase is attributed to strong corporate
compliance business, continued solid demand for EDGAR services and strong
growth in investment company services work. Document management services
revenues grew 35 percent in fiscal year 1998, reflecting continued growth in
the number of Document Service Centers which totaled 76 at January 31, 1998.
This resulted from internal growth and the acquisition of selected assets of
Total Management Support Services, LLC. The commercial and other category
realized a 17 percent increase in revenues over fiscal year 1997. The growth
is primarily the result of our managed communications programs which includes
Merrill/May, FMC Resource Management Corporation (FMC) and the Superstar
Computing acquisition.
Fiscal year 1998 gross profit of approximately 36 percent remained level
with fiscal year 1997. Continued strong margins in both financial and
corporate activity along with high production utilization allowed us to
maintain the same margins.
REVENUES BY SERVICE
YEARS ENDED JANARY 31,
----------------------
1996 1997 1998
---- ---- ----
IN PERCENT
Commercial and other............... 21.5 20.6 18.5
Document management services....... 12.9 11.2 11.7
Corporate.......................... 29.5 27.6 31.6
Financial.......................... 36.1 40.6 38.2
MERRILL CORPORATION 9
<PAGE>
Selling, general and administrative expenses increased, but as a percent
of revenue, declined slightly in the last year. The increase in these
expenses in fiscal year 1998 was principally a result of our continued
expansion of sales and marketing activities and provisions for incentive
compensation.
Average short-term borrowings under the Company's line of credit
arrangement were approximately $4,729,000, $30,117,000 and $2,221,000 in
fiscal years 1998, 1997 and 1996, respectively. The significant decrease in
the average short-term borrowings in fiscal year 1998 resulted from the
issuance of $35 million in unsecured senior notes in October 1996.
Interest expense for fiscal year 1998 remained relatively consistent
compared to fiscal year 1997 which reflects stable interest rates and
consistent overall amounts borrowed during the time periods.
The effective tax rate for fiscal year 1998 was 44 percent compared to
45 percent for fiscal year 1997. The effective rates were higher than the
statutory federal rate of 35 percent primarily because of state income taxes
and the impact of increased non-deductible business entertainment expenses
incurred in conjunction with the additional financial and corporate activity
previously discussed. The effective tax rate in future years is expected to
approximate 44 percent.
Technology changes for potential year 2000 issues are not currently
expected to have a material impact on the Company's operations, although the
effectiveness of the Company's present efforts to address the Year 2000 issue
cannot be assured. A detailed year 2000 project plan is in progress and
includes review of internally developed software as well as outside developed
software. A test plan has been initiated in fiscal year 1999 to ensure
compliance with the year 2000 issues. The costs to address year 2000 issues
will likely be material; the present estimate is approximately $900,000, to
be incurred primarily during fiscal year 1999. The total costs may be higher,
contingent upon additional review of the issues. It is currently unknown
whether vendors and other third parties with which the Company conducts
business will successfully address the Year 2000 issue with respect to their
own computer software. If the Company's present efforts to address the Year
2000 issue are not successful, or if vendors and other third parties with
which the Company conducts business do not successfully address the Year 2000
issue, the Company's business, financial condition and results of operations
could be adversely affected.
FISCAL YEAR 1997 VS. FISCAL YEAR 1996 Revenues for fiscal year 1997
increased 44 percent over the previous year. The financial revenues category
experienced a 62 percent increase in revenues over fiscal year 1996. This
increase was driven by the inclusion of nine months of operations from the
CPC acquisition in April 1996, as well as strong financial market activity
throughout fiscal year 1997. International revenues, which are included in
the financial revenues category, represented less than 5 percent of
consolidated revenues and approximated fiscal year 1996 international
revenues. Corporate revenues increased 35 percent when compared to fiscal
year 1996. This increase is attributed to a strong demand for EDGAR services
and growth in mutual fund activity plus long-term mutual fund clients gained
from the CPC acquisition. Document management services revenues grew 26
percent in fiscal year 1997, reflecting new service offerings and continued
growth in the number of document service centers, which totaled 64 at January
31, 1997. The commercial and other revenues category experienced a 38 percent
increase in revenues during fiscal year 1997. The growth is primarily the
result of including 10 months of operations of FMC, which was acquired in
March 1996, and election-related ballot work, which was lower in the
off-election year of 1996. Merrill/May revenues were up slightly from fiscal
year 1996 revenues.
10 1998 ANNUAL REPORT
<PAGE>
Fiscal year 1997 gross profit increased to approximately 36 percent
compared to 32 percent in fiscal year 1996. The increase in gross profit was
attributed to the significant increase in volume of financial transaction
documents during the year. Financial transaction business generally results
in higher margins when compared to the other service categories offered by
the Company. The general increase in the volume of work across all service
categories also contributed to the increase in gross profit as the Company
maximized the utilization of its operating resources.
The increase in selling, general and administrative expenses in fiscal
year 1997 was attributed to integration costs associated with the fiscal year
1997 acquisitions of CPC and FMC, the related goodwill amortization,
continued expansion of the Company's sales and marketing activities and
provisions for incentive compensation.
The significant increase in the average short-term borrowings during
fiscal year 1997 resulted from financing the Company's acquisitions of CPC
and FMC with the bank line of credit for approximately six months of fiscal
year 1997.
Interest expense for fiscal year 1997 was significantly higher than for
fiscal year 1996, which was attributed to the financing of the acquisitions
noted above, and the increased need for working capital to support the strong
financial transaction activity.
The effective tax rate for fiscal year 1997 was 45 percent compared to
43 percent for fiscal year 1996. The effective rates were higher than the
statutory federal rate of 35 percent primarily because of state income taxes
and the impact of increased non-deductible business entertainment expenses
incurred in conjunction with the additional financial and corporate activity
previously discussed.
IMPACT OF INFLATION The Company does not believe that inflation has had a
significant impact on the results of its operations.
LIQUIDITY AND CAPITAL RESOURCES Working capital at January 31, 1998,
increased to $79.3 million from $69.2 million a year ago, reflecting strong
sales activity during the entire year. The increase in sales activity
resulted in a corresponding increase in trade receivables at January 31,
1998. Work-in-process inventories decreased at January 31, 1998, reflecting
lower activities experienced during the last quarter of the year and
initiatives implemented to improve inventory turns. Capital expenditures for
the year approximated $17.0 million and were primarily related to leasehold
improvements and reprographic and computer based production equipment. Cash
and cash equivalents decreased to $2.5 million and there were no borrowings
under the Company's line of credit at January 31, 1998. Long-term obligations
were 25.0 percent of total capitalization at January 31, 1998, compared to
30.8 percent a year ago.
The Company expects capital expenditures in fiscal year 1999 to range
from $20 million to $25 million for computer and production equipment and
facility expansion and remodeling. Approximately $2.0 million of this amount
is committed at this time.
MERRILL CORPORATION 11
<PAGE>
The Company has historically been working-capital intensive, but in
recent years has increased its needs for technology and production equipment.
The Company generally has been able to generate sufficient cash from
operations to fund its capital needs.
At January 31, 1998, the Company's principal internal sources of
liquidity were cash and cash equivalents and cash flow provided by operating
activities. The Company has available a $40 million unsecured bank line of
credit expiring on November 29, 1999. Management anticipates that these
sources will satisfy its needs for fiscal year 1999.
NEW ACCOUNTING PRONOUNCEMENT Effective January 31, 1999, the Company will
adopt Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosures
About Segments of an Enterprise and Related Information." The Company is
reviewing the requirements of this statement. This statement does not impact
the basic Consolidated Financial Statements; it affects only the presentation
of segment information in the Notes to the Financial Statements.
- --------------------------------------------------------------------------------
QUARTERLY STOCK PRICE INFORMATION
Merrill Corporation shares are traded on the NASDAQ Stock Market under the
symbol MRLL. The table below sets forth the range of high and low sales
prices per share as reported by the NASDAQ Stock Market. For periods prior to
August 1997, high and low sales prices in the table below have been
retroactively restated to reflect the 2-for-1 stock split described in Note 8
to the Consolidated Financial Statements. These prices do not include
adjustments for retail markups, markdowns or commissions. There were
approximately 2,125 shareholders of record and non-objecting beneficial
owners of the Company's common stock at the close of trading on April 14,
1998. The Company paid annualized cash dividends of $.07 per share in fiscal
1998 and $.06 per share in fiscal 1997. Total cash dividends approximated
$1,133,000 and $948,000 in fiscal years 1998 and 1997, respectively.
<TABLE>
<CAPTION>
First Second Third Fourth
Stock Price Per Share Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FY 1998 High 14 20 5/16 24 1/4 24
Low 10 1/4 11 5/8 17 1/8 18 5/32
FY 1997 High 11 13 1/4 12 1/4 12 3/8
Low 7 1/4 9 1/8 9 1/2 10 1/4
</TABLE>
12 1998 ANNUAL REPORT
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of January 31,
---------------------
(In thousands, except share data) 1998 1997
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,531 $ 5,161
Trade receivables, less allowance for doubtful
accounts of $6,992 and $6,027, respectively 116,721 81,733
Work-in-process inventories 13,686 24,958
Other inventories 7,112 4,878
Other current assets 10,290 9,933
- ----------------------------------------------------------------------------------------
Total current assets 150,340 126,663
Property, plant and equipment, net 41,045 34,717
Goodwill, net 44,437 34,030
Other assets 10,657 6,587
- ----------------------------------------------------------------------------------------
Total assets $246,479 $201,997
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to banks $ 5,950
Current maturities of long-term debt $ 655 645
Current maturities of capital lease obligations 249 307
Accounts payable 29,142 20,387
Accrued expenses 41,033 30,154
- ----------------------------------------------------------------------------------------
Total current liabilities 71,079 57,443
Long-term debt, net of current maturities 40,225 40,880
Capital lease obligations, net of current maturities 1,616 1,849
Other liabilities 7,884 5,665
- ----------------------------------------------------------------------------------------
Total liabilities 120,804 105,837
- ----------------------------------------------------------------------------------------
Commitments and contingencies (Notes 3 and 5)
Shareholders' equity
Common stock, $.01 par value: 25,000,000 shares
authorized; 16,315,136 and 15,865,048 shares,
respectively, issued and outstanding 163 159
Undesignated stock: 500,000 shares authorized;
no shares issued
Additional paid-in capital 22,401 17,778
Retained earnings 103,111 78,223
- ----------------------------------------------------------------------------------------
Total shareholders' equity 125,675 96,160
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $246,479 $201,997
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
MERRILL CORPORATION 13
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended January 31,
--------------------------------------------
(In thousands, except share and per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 459,516 $ 353,769 $ 245,306
Cost of revenues 295,390 227,478 165,765
- ------------------------------------------------------------------------------------------------
Gross profit 164,126 126,291 79,541
Selling, general and administrative expenses 114,174 89,946 60,079
- ------------------------------------------------------------------------------------------------
Operating income 49,952 36,345 19,462
Interest expense (4,321) (4,124) (1,099)
Other income, net 835 263 343
- ------------------------------------------------------------------------------------------------
Income before provision for income taxes 46,466 32,484 18,706
Provision for income taxes 20,445 14,645 8,044
- ------------------------------------------------------------------------------------------------
Net income $ 26,021 $ 17,839 $ 10,662
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 1.61 $ 1.13 $ .69
Diluted $ 1.54 $ 1.11 $ .68
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding:
Basic 16,129,341 15,792,161 15,502,403
Diluted 16,906,382 16,117,432 15,782,979
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14 1998 ANNUAL REPORT
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended January 31,
-----------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 26,021 $ 17,839 $ 10,662
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 11,147 10,825 9,724
Amortization of intangible assets 4,286 2,581 1,088
Provision for losses on trade receivables 2,064 2,861 1,486
Provision for unbillable inventories (1,063) 2,678 250
Deferred income taxes (2,592) (6,555) (2,583)
Change in deferred compensation 1,285 401 582
Changes in operating assets and liabilities,
net of effects from business acquisitions
Trade receivables (36,706) (18,499) (10,768)
Work-in-process inventories 12,082 (11,667) (4,141)
Other inventories (1,667) 583 (709)
Other current assets (1,798) (1,718) 315
Accounts payable 7,336 (3,720) 1,594
Accrued expenses 11,537 11,365 2,142
Income taxes (1,059) 1,530 (89)
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,873 8,504 9,553
- --------------------------------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (17,069) (9,216) (12,487)
Business acquisitions, net of cash acquired (13,179) (26,010)
Other, net 137 (564) (727)
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (30,111) (35,790) (13,214)
- --------------------------------------------------------------------------------------------------
Financing activities
Borrowings on notes payable to banks 104,275 139,050 51,700
Repayments on notes payable to banks (110,225) (139,100) (45,700)
Proceeds from issuance of long-term debt 35,000
Principal payments on long-term debt and
capital lease obligations (936) (15,164) (1,243)
Repurchase of common stock (3,065)
Dividends paid (1,133) (948) (931)
Exercise of stock options 5,417 1,045 1,024
Tax benefit realized upon exercise of stock options 2,192 328 1,451
Other equity transactions, net 83 162 (533)
- --------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (3,392) 20,373 5,768
- --------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (2,630) (6,913) 2,107
Cash and cash equivalents, beginning of year 5,161 12,074 9,967
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,531 $ 5,161 $ 12,074
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures
Income taxes paid $ 22,000 $ 19,253 $ 9,268
Interest paid 3,757 2,866 880
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
MERRILL CORPORATION 15
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the Years Ended January 31, 1998, 1997 and 1996
----------------------------------------------------
Additional
Common Paid-in Retained
(In thousands, except per share data) Stock Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 31, 1995 $ 152 $ 14,308 $ 51,601 $ 66,061
Exercise of stock options 5 1,019 1,024
Tax benefit realized upon exercise of stock options 1,451 1,451
Other (533) (533)
Cash dividends ($.06 per share) (931) (931)
Net income 10,662 10,662
- ----------------------------------------------------------------------------------------------------------------
Balance, January 31, 1996 $ 157 $ 16,245 $ 61,332 $ 77,734
- ----------------------------------------------------------------------------------------------------------------
Exercise of stock options 2 1,043 1,045
Tax benefit realized upon exercise of stock options 328 328
Other 162 162
Cash dividends ($.06 per share) (948) (948)
Net income 17,839 17,839
- ----------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 $ 159 $ 17,778 $ 78,223 $ 96,160
- ----------------------------------------------------------------------------------------------------------------
Exercise of stock options 7 5,410 5,417
Tax benefit realized upon exercise of stock options 2,192 2,192
Repurchase of common stock (3) (3,062) (3,065)
Other 83 83
Cash dividends ($.07 per share) (1,133) (1,133)
Net income 26,021 26,021
- ----------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1998 $ 163 $ 22,401 $ 103,111 $125,675
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ONE - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS The Company provides paper and electronic document
services consisting of creative design, typesetting, printing, reproduction,
distribution, and data and information management services to financial,
legal, investment company, real estate and corporate clients worldwide.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates relate to
the determination of the allowances for doubtful accounts and unbillable
inventories.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
INVENTORIES Work-in-process, which includes purchased services, materials,
direct labor and overhead, is valued at the lower of cost or net realizable
value, with cost determined on a specific job-cost basis. Other inventories
consist primarily of paper and printed materials and are valued at the lower
of cost or market, with cost determined on a specific job-cost basis.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at
cost. Significant additions or improvements extending asset lives are
capitalized; normal maintenance and repair costs are expensed as incurred.
Depreciation is determined using the straight-line method over the estimated
useful lives of the assets which range from three to 30 years. Amortization of
leasehold improvements is recorded on a straight-line basis over the estimated
useful lives of the assets or the lease term, whichever is shorter. When
assets are sold or retired, related gains or losses are included in the
results of operations.
GOODWILL Goodwill recognized in business acquisitions accounted for as
purchases is amortized on the straight-line method, principally over 15 years.
The Company periodically evaluates the recoverability of unamortized goodwill
through measurement of future estimated undiscounted operating unit cash flows.
INCOME TAXES Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable for the year
and the change during the year in deferred tax assets and liabilities.
REVENUE RECOGNITION The Company recognizes revenue when service projects are
completed or products are shipped.
NET INCOME PER SHARE Effective January 31, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share," and has disclosed basic and diluted net income per share for all
periods presented in accordance with the standard. The dilutive effect on net
income per share resulted from the assumed exercise of dilutive stock options
outstanding under the Company's stock option plans.
MERRILL CORPORATION 17
<PAGE>
- --------------------------------------------------------------------------------
ONE - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation costs for stock options granted to
employees are measured as the excess, if any, of the fair value of the
Company's stock at the date of the grant over the amount an employee must pay
to acquire the stock. Such compensation costs, if any, are amortized on a
straight-line basis over the underlying option vesting terms. The Company
accounts for stock-based compensation to non-employees using the fair value
method prescribed by SFAS No. 123, "Accounting for Stock Based Compensation."
Compensation costs for stock options granted to non-employees are measured as
the excess of the fair value of the option over the amount the holder must pay
to acquire the stock.
BUSINESS SEGMENTS Effective January 31, 1999, the Company will adopt SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information. "
The Company is reviewing the requirements of this statement. This statement
does not impact the basic Consolidated Financial Statements; it affects only
the presentation of segment information in the Notes to Financial Statements.
- --------------------------------------------------------------------------------
TWO - SELECTED FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
As of January 31,
-----------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT, NET
Land $ 1,951 $ 1,951
Buildings 11,965 11,778
Equipment 54,929 45,250
Furniture and fixtures 11,057 9,655
Leasehold improvements 10,479 9,923
Construction in progress 5,609 659
- --------------------------------------------------------------------------------
95,990 79,216
Less accumulated depreciation and amortization (54,945) (44,499)
- --------------------------------------------------------------------------------
$ 41,045 $ 34,717
- --------------------------------------------------------------------------------
GOODWILL, NET
Goodwill $ 52,913 $ 38,481
Less accumulated amortization (8,476) (4,451)
- --------------------------------------------------------------------------------
$ 44,437 $ 34,030
- --------------------------------------------------------------------------------
ACCRUED EXPENSES
Commissions and compensation $ 25,003 $ 17,926
Retirement plan 4,965 3,860
Other 11,065 8,368
- --------------------------------------------------------------------------------
$ 41,033 $ 30,154
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
18 1998 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
THREE - BUSINESS ACQUISITIONS
On April 15, 1996, the Company purchased substantially all of the operating
assets and assumed certain liabilities of The Corporate Printing Company, Inc.
and Affiliated Group (CPC) for approximately $22.6 million in cash. The
Company did not purchase any assets relating to CPC's pressroom and shipping
businesses. The purchase price was subsequently reduced by approximately $1.7
million in accordance with terms of the purchase agreement. In accordance with
the agreement, additional contingent purchase consideration of $8 million was
paid in August 1997. The Company also entered into a five-year non-compete
agreement with CPC's principal shareholder that requires payments totaling
$3.4 million through April 15, 2001. The principal shareholder is also
entitled to an additional $500,000 annually through March 31, 2001, as the
Company maintains certain business of a specified customer. The acquisition
has been accounted for as a purchase.
On March 28, 1996, the Company purchased all of the outstanding common
stock of FMC Resource Management Corporation for $5.4 million in cash and
promissory notes for $2.0 million. The agreement calls for additional
contingent consideration, not to exceed $4 million, based on annual gross
profits of the acquired business through January 31, 2001, as defined in the
agreement. Contingent consideration recorded through January 31, 1998, was
$1.6 million. The acquisition has been accounted for as a purchase.
Results of the acquired companies' operations have been included in the
Consolidated Statements of Operations from their respective dates of
acquisitions. Pro forma (unaudited) results of the Company for the years ended
January 31, 1997 and 1996, as if the acquisitions had been effective at
February 1, 1995, are as follows:
<TABLE>
<CAPTION>
For the Years Ended January 31,
--------------------------------
(In thousands, except per share data) 1997 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues $376,647 $325,157
Net income 17,047 8,263
Net income per share - diluted 1.05 .52
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
During fiscal year 1998, the Company completed the acquisitions of
substantially all of the operating assets and assumed certain liabilities of
Roald Marth Learning Systems, Inc., doing business as Superstar Computing and
Total Management Support Services, LLC. These acquisitions are not
significant to the financial position or results of operations of the Company.
MERRILL CORPORATION 19
<PAGE>
- --------------------------------------------------------------------------------
FOUR - FINANCING ARRANGEMENTS
BANK FINANCING The Company has a revolving credit agreement with a group of
banks that provides for a $40 million unsecured bank line of credit which
expires on November 29, 1999. There were no borrowings outstanding under this
agreement at January 31, 1998. Borrowings under the agreement were $5,950,000
at January 31, 1997, and bore interest at the Agent's reference rate (8.25%
at January 31, 1997). Under the agreement, the Company has the option to
borrow at the Agent's reference rate, at 1% above the London Interbank
Offered Rate (LIBOR) or at 1.0% above a certificate of deposit-based rate,
and is required to pay quarterly commitment fees of 0.25% on the unused
portion of the line of credit. The weighted average interest rates on
borrowings on the line of credit were 8.26%, 7.39%, and 8.83% for the years
ended 1998, 1997 and 1996, respectively. The revolving credit agreement
includes various covenants, including the maintenance of minimum tangible net
worth and limitations on the amounts of certain transactions, including
payment of dividends.
LONG-TERM DEBT Long-term debt consisted of the following:
<TABLE>
<CAPTION>
As of January 31,
----------------------
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured senior notes, bearing interest at 7.463%, with semi-annual interest
only payments through October 2000, at which time annual principal and
semi-annual interest payments are due through October 2006. The notes have
various covenants, including the maintenance of certain financial ratios and
limitations on the amount of certain transactions including
the payment of dividends $ 35,000 $ 35,000
Industrial development bonds, due in annual installments, including
interest ranging from 7.0% to 8.375%, over the life of the bonds with the
remaining unpaid balance due on August 1, 2010; collateralized by land,
building and equipment with a carrying value of $3,760
at January 31, 1998 3,380 3,525
Unsecured promissory notes payable due in March 1999. The notes bear
interest at LIBOR plus 1.0%, adjustable and payable annually. The
interest rate at January 31, 1998 and 1997 was 7.281% and 6.608%,
respectively 2,000 2,000
Unsecured promissory note payable in equal annual installments of $500
on December 31 through 1998. The note bears interest at the prime rate
The prime interest rate at January 31, 1998 and 1997 was 8.50% and
8.25%, respectively 500 1,000
- ------------------------------------------------------------------------------------------------------
40,880 41,525
Less current maturities of long-term debt (655) (645)
- ------------------------------------------------------------------------------------------------------
$ 40,225 $ 40,880
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
20 1998 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
FOUR - FINANCING ARRANGEMENTS, CONTINUED
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 655
2000 2,170
2001 5,180
2002 5,195
2003 5,210
Thereafter 22,470
- --------------------------------------------------------------------------------
$40,880
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Based on quoted market prices for similar issues, the fair value of long-term
debt approximated its carrying value at January 31, 1998 and 1997.
- --------------------------------------------------------------------------------
FIVE - LEASES
The Company leases an office and production facility and the associated land
and equipment under capital leases that terminate at various dates through
November 30, 2005. Certain leases contain bargain purchase options. A summary
of the Company's property under capital leases, which is classified as
property, plant and equipment, is as follows:
<TABLE>
<CAPTION>
As of January 31,
----------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 333 $ 333
Building 2,439 2,439
Equipment 594 594
Less accumulated amortization (1,366) (1,129)
- --------------------------------------------------------------------------------
$ 2,000 $ 2,237
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Company also leases office space and equipment under noncancelable
operating leases which expire at various dates through October 31, 2018.
Rental expense charged to operations was $8,019,000, $6,009,000 and
$5,123,000, for the years ended January 31, 1998, 1997 and 1996, respectively.
Future minimum rental commitments under noncancelable leases at January
31, 1998, are as follows:
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 434 $ 6,044
2000 392 4,876
2001 330 3,824
2002 330 2,851
2003 330 2,547
Thereafter 935 21,183
- --------------------------------------------------------------------------------
2,751 $ 41,325
---------
---------
Imputed interest (886)
- ----------------------------------------------------------------
Present value of minimum lease payments 1,865
Less current maturities of capital lease obligations (249)
- ----------------------------------------------------------------
Capital lease obligations, net of current maturities $ 1,616
- ----------------------------------------------------------------
- ----------------------------------------------------------------
</TABLE>
MERRILL CORPORATION 21
<PAGE>
- --------------------------------------------------------------------------------
SIX - INCOME TAXES
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
For the Years Ended January 31,
---------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 19,974 $ 17,758 $ 9,203
State 3,063 3,442 1,424
- --------------------------------------------------------------------------------
23,037 21,200 10,627
Deferred (2,592) (6,555) (2,583)
- --------------------------------------------------------------------------------
Provision for income taxes $ 20,445 $ 14,645 $ 8,044
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Temporary differences comprising the net deferred tax asset recognized in the
accompanying Consolidated Balance Sheets are as follows:
<TABLE>
<CAPTION>
As of January 31,
--------------------
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
<S> <C> <C>
Depreciation and amortization $ 2,126 $1,102
Deferred compensation 1,980 1,382
Allowance for doubtful accounts 1,349 2,676
Insurance reserves 1,130 1,001
Vacation 1,085 653
Inventories 958 300
Other, net 1,405 327
- ---------------------------------------------------------------------------------
Net deferred tax asset $10,033 $7,441
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
Management expects that the Company will fully realize the benefits
attributable to the net deferred tax asset at January 31, 1998. Accordingly,
no valuation allowance has been recorded at January 31, 1998.
Significant differences between income taxes on income for financial
reporting purposes and income taxes calculated using the federal statutory
tax rate are as follows:
<TABLE>
<CAPTION>
As of January 31,
---------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for federal income taxes at
statutory rate $16,263 $11,369 $6,547
State income taxes, net of federal benefit 1,646 1,444 695
Non-deductible business meeting and
entertainment expenses 1,832 1,210 778
Other 704 622 24
- --------------------------------------------------------------------------------
$20,445 $14,645 $8,044
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Consolidated federal income tax returns filed by the Company have been
examined by the Internal Revenue Service through fiscal 1994. The Company's
fiscal 1995 and 1996 federal and certain state income tax returns are
presently under audit. Management believes any additional taxes which may
ultimately result from these audits or any other state or local agencies'
audits would not have a material adverse effect on the Company's consolidated
financial position.
22 1998 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
SEVEN - RETIREMENT PLAN
The Company has a defined contribution retirement plan covering substantially
all employees. Contributions to the plan are based on 7% of eligible employee
compensation. Costs charged to operations were $4,965,000, $3,860,000 and
$3,620,000 for the years ended January 31, 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
EIGHT - SHAREHOLDERS' EQUITY
COMMON STOCK In August 1997, the Company's Board of Directors declared a
2-for-1 stock split of the Company's common stock in the form of a 100% stock
dividend which was paid on October 15, 1997, to shareholders of record, on
September 30, 1997. The Consolidated Statements of Changes in Shareholders'
Equity and all share and per share amounts have been retroactively restated
to reflect the stock split. Also, all information regarding shares
outstanding, stock purchase agreements, stock options and stock grants has
been retroactively restated to reflect the stock split.
The classes, series, rights and preferences of the undesignated stock
may be established by the Company's Board of Directors. No action with
respect to such shares has been taken. During fiscal year 1997, the Company's
Board of Directors approved the repurchase of up to 1,500,000 shares of the
Company's common stock. Through January 31, 1998, 264,000 shares of common
stock had been repurchased for approximately $3.1 million.
EARNINGS PER SHARE The denominator used to calculate diluted earnings per
share includes the dilutive impact of 777,041, 325,271 and 280,576 stock
options for the years ended January 31, 1998, 1997 and 1996, respectively.
STOCK PLANS Under Company-sponsored incentive and stock option plans,
5,806,000 shares of common stock were reserved for the granting of incentive
awards to employees in the form of incentive stock options, nonstatutory
stock options and restricted stock awards at exercise prices not less than
100% of the fair market value of the Company's common stock on the date of
grant. As of January 31, 1998, stock options for 4,851,400 shares and 70,800
restricted stock awards had been granted under the plans, leaving 883,800
shares available for future grants.
In May 1996, the shareholders of the Company approved the Company's 1996
Non-employee Director Plan (the Plan) whereby 400,000 shares of common stock
were reserved for granting of non-statutory options and awarding of common
stock as partial payment to non-employee directors who serve on the Company's
Board of Directors. Non-statutory stock options issued under the Plan are
granted at an exercise price not less than 100% of the fair market value of
the Company's common stock on the date of grant. Compensation expense is
recorded when common stock is awarded as partial payment for the director's
annual retainer in an amount approximately equal to the fair market value of
the Company's common stock on the date of grant. As of January 31, 1998,
non-statutory options for 92,000 shares and 6,694 shares of common stock had
been granted under the Plan, leaving 301,306 shares available for future
grants.
In addition to options granted under the plans above, the Company has
granted non-qualified options to directors and consultants at prices equal to
or exceeding market value at date of grant. Options granted under all
Company-sponsored stock plans generally vest and expire over five to seven
years.
MERRILL CORPORATION 23
<PAGE>
- --------------------------------------------------------------------------------
EIGHT - SHAREHOLDERS' EQUITY, CONTINUED
A summary of selected information regarding all stock options for the three
years ended January 31, 1998, is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 31, 1995 1,971,928 $ 1.68-14.88 $ 7.06
- ----------------------------------------------------------------------------------
Granted 609,000 8.13-9.25 8.22
Exercised (556,600) 1.68-8.68 1.84
Canceled (169,700) 8.68-14.88 10.05
- ----------------------------------------------------------------------------------
Balance, January 31, 1996 1,854,628 2.00-14.88 8.46
Granted 1,092,000 8.12-11.96 9.06
Exercised (152,436) 3.68-10.38 6.85
Canceled (106,364) 8.12-13.25 9.86
- ----------------------------------------------------------------------------------
Balance, January 31, 1997 2,687,828 2.00-14.88 8.74
Granted 1,129,200 11.19-22.75 13.95
Exercised (759,400) 2.00-15.06 7.88
Canceled (88,200) 8.13-10.00 8.86
- ----------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1998 2,969,428 $ 2.00-22.75 $ 10.94
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
At January 31, 1998, the weighted average exercise price and remaining life
of the stock options are as follows:
<TABLE>
<CAPTION>
Range of exercise prices $ 2.00-8.25 $ 8.69-13.50 $ 14.75-22.75 Total
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total options outstanding 896,500 1,694,928 378,000 2,969,428
Weighted average exercise price $ 7.88 $ 10.89 $ 18.38 $ 10.94
Weighted average remaining life 6.8 years 6.1 years 5.8 years 6.3 years
- --------------------------------------------------------------------------------------------
Options exercisable 163,200 233,328 36,000 432,528
Weighted average price of
exercisable options $ 6.79 $ 11.39 $ 14.75 $ 9.93
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
24 1998 ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
EIGHT - SHAREHOLDERS' EQUITY, CONTINUED
Had the Company used the fair value-based method of accounting for its
incentive and stock option plans beginning on February 1, 1995, and charged
compensation cost against income, over the vesting period, based on the fair
value of options at the date of grant, net income and net income per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
For the Years Ended January 31,
----------------------------------
(In thousands except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME
As reported $26,021 $17,839 $10,662
Pro forma 24,541 17,223 10,444
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET INCOME PER SHARE
As reported - basic $ 1.61 $ 1.13 $ .69
As reported - diluted 1.54 1.11 .68
Pro forma - basic 1.52 1.09 .67
Pro forma - diluted 1.45 1.07 .66
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The pro forma information above includes only stock options granted in fiscal
years 1996-1998. Pro forma compensation expense under the fair value-based
method of accounting will increase in the future as additional stock option
grants will be considered.
The weighted average grant date fair value of options granted during
fiscal years 1998, 1997 and 1996 was $6.68, $4.72 and $4.42, respectively.
The weighted average grant date fair value of options was calculated by using
the fair value of each option grant, utilizing the Black-Scholes
option-pricing model and the following key assumptions:
<TABLE>
<CAPTION>
For the Years Ended January 31,
---------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 6.50% 6.87% 6.28%
Expected life 5 YEARS 6 years 6 years
Expected volatility 43.52% 48.85% 49.26%
Expected dividend yield 0.38% 0.68% 0.58%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
MERRILL CORPORATION 25
<PAGE>
- --------------------------------------------------------------------------------
NINE - QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data for the years ended
January 31, 1998 and 1997:
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands except per share data) Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 Revenues $ 109,859 $ 115,601 $ 112,091 $ 121,965 $ 459,516
Gross profit 43,585 41,066 39,374 40,101 164,126
Net income 7,754 6,312 5,707 6,248 26,021
Net income per share - basic .49 .39 .35 .38 1.61
Net income per share - diluted .47 .38 .33 .36 1.54
Dividends declared per share .015 .015 .02 .02 .07
- -----------------------------------------------------------------------------------------------------
1997 Revenues $ 71,200 $ 87,569 $ 93,776 $ 101,224 $ 353,769
Gross profit 25,170 32,691 32,273 36,157 126,291
Net income 4,245 4,671 4,377 4,546 17,839
Net income per share - basic .27 .29 .28 .29 1.13
Net income per share - diluted .27 .29 .27 .28 1.11
Dividends declared per share .015 .015 .015 .015 .06
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
26 1998 ANNUAL REPORT
<PAGE>
SUMMARY OF OPERATING AND FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended January 31,
(In thousands, except employee, ---------------------------------------------------------------------
per share data and ratio) 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues $459,516 $353,769 $245,306 $236,878 $181,584 $147,716
Costs and expenses 413,050 321,285 226,600 215,724 159,593 133,552
- --------------------------------------------------------------------------------------------------------
Income before provision
for income taxes 46,466 32,484 18,706 21,154 21,991 14,164
Provision for income taxes 20,445 14,645 8,044 9,171 8,820 5,565
- --------------------------------------------------------------------------------------------------------
Net income $ 26,021 $ 17,839 $ 10,662 $ 11,983 $ 13,348 $ 8,599
- --------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income - basic $ 1.61 $ 1.13 $ .69 $ .79 $ .90 $ .60
Net income - diluted $ 1.54 $ 1.11 $ .68 $ .76 $ .86 $ .57
Cash dividends declared $ .07 $ .06 $ .06 $ .06 $ .05
Book value $ 7.70 $ 6.06 $ 4.95 $ 4.35 $ 3.58 $ 2.68
- --------------------------------------------------------------------------------------------------------
FINANCIAL DATA/OTHER
Working capital $ 79,261 $ 69,220 $ 39,379 $ 31,523 $ 22,528 $ 24,650
Current ratio 2.1 2.2 2.0 2.0 1.6 2.1
Total assets $246,479 $201,997 $125,521 $106,470 $100,123 $ 66,042
Shareholders' equity $125,675 $ 96,160 $ 77,734 $ 66,061 $ 53,597 $ 39,330
Return on average
shareholders' equity 23.5% 20.5% 14.8% 20.0% 28.7% 25.1%
Long-term obligations $ 41,841 $ 42,729 $ 6,454 $ 7,522 $ 8,656 $ 2,138
Long-term obligations to
capitalization 25.0% 30.8% 7.7% 10.2% 13.9% 5.2%
Number of employees 3,297 2,539 1,932 1,739 1,601 1,041
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL CORPORATION 27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Merrill Corporation:
We have audited the accompanying consolidated balance sheets of Merrill
Corporation and Subsidiaries as of January 31, 1998 and 1997, and the related
consolidated statements of operations, cash flows and changes in
shareholders' equity for each of the three years in the period ended January
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Merrill Corporation and Subsidiaries as of January 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
St. Paul, Minnesota
March 30, 1998
28 1998 ANNUAL REPORT
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION PERCENT OWNED
- --------------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Merrill/New York Company............................................. Minnesota 100%
Merrill/Magnus Publishing Corporation................................ Minnesota 100%
Merrill Corporation, Canada ......................................... Ontario 100%
Merrill/May, Inc..................................................... Minnesota 100%
Merrill International Inc............................................ Minnesota 100%
Merrill Real Estate Company.......................................... Minnesota 100%
FMC Resource Management Corporation.................................. Washington 100%
Merrill Training & Technology, Inc................................... Minnesota 100%
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 of Merrill Corporation and Subsidiaries (File Nos. 33-46275,
33-52623 and 33-06897) of our report dated March 30, 1998, on our audits of
the consolidated financial statements of Merrill Corporation and Subsidiaries
as of January 31, 1998 and 1997, and for each of the three years in the
period ended January 31, 1998, which report is incorporated by reference in
this Annual Report on Form 10-K, and our report dated March 30, 1998, on the
related financial statement schedule included in this Annual Report on Form
10-K.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
May 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 2,531
<SECURITIES> 0
<RECEIVABLES> 123,713
<ALLOWANCES> 6,992
<INVENTORY> 20,798
<CURRENT-ASSETS> 150,340
<PP&E> 95,990
<DEPRECIATION> 54,945
<TOTAL-ASSETS> 246,479
<CURRENT-LIABILITIES> 71,079
<BONDS> 41,841
0
0
<COMMON> 163
<OTHER-SE> 125,512
<TOTAL-LIABILITY-AND-EQUITY> 246,479
<SALES> 459,516
<TOTAL-REVENUES> 459,516
<CGS> 295,390
<TOTAL-COSTS> 295,390
<OTHER-EXPENSES> 114,174
<LOSS-PROVISION> 2,064
<INTEREST-EXPENSE> 4,321
<INCOME-PRETAX> 46,466
<INCOME-TAX> 20,445
<INCOME-CONTINUING> 26,021
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,021
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.54
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 2,781
<SECURITIES> 0
<RECEIVABLES> 113,678
<ALLOWANCES> 8,601
<INVENTORY> 26,646
<CURRENT-ASSETS> 148,155
<PP&E> 92,338
<DEPRECIATION> 52,449
<TOTAL-ASSETS> 238,087
<CURRENT-LIABILITIES> 69,887
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 119,445
<TOTAL-LIABILITY-AND-EQUITY> 238,087
<SALES> 337,551
<TOTAL-REVENUES> 337,551
<CGS> 213,526
<TOTAL-COSTS> 213,526
<OTHER-EXPENSES> 88,589
<LOSS-PROVISION> 3,002
<INTEREST-EXPENSE> 3,283
<INCOME-PRETAX> 35,436
<INCOME-TAX> 15,663
<INCOME-CONTINUING> 19,773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,773
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.18
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 1,576
<SECURITIES> 0
<RECEIVABLES> 111,302
<ALLOWANCES> 9,844
<INVENTORY> 28,778
<CURRENT-ASSETS> 143,320
<PP&E> 88,892
<DEPRECIATION> 49,655
<TOTAL-ASSETS> 232,541
<CURRENT-LIABILITIES> 71,288
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 112,711
<TOTAL-LIABILITY-AND-EQUITY> 232,541
<SALES> 225,460
<TOTAL-REVENUES> 225,460
<CGS> 140,809
<TOTAL-COSTS> 140,809
<OTHER-EXPENSES> 59,306
<LOSS-PROVISION> 3,960
<INTEREST-EXPENSE> 2,130
<INCOME-PRETAX> 25,345
<INCOME-TAX> 11,279
<INCOME-CONTINUING> 14,066
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,066
<EPS-PRIMARY> .88
<EPS-DILUTED> .85
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 4,113
<SECURITIES> 0
<RECEIVABLES> 101,412
<ALLOWANCES> 8,017
<INVENTORY> 34,073
<CURRENT-ASSETS> 139,336
<PP&E> 83,115
<DEPRECIATION> 47,231
<TOTAL-ASSETS> 217,554
<CURRENT-LIABILITIES> 67,295
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 101,845
<TOTAL-LIABILITY-AND-EQUITY> 217,554
<SALES> 109,859
<TOTAL-REVENUES> 109,859
<CGS> 66,274
<TOTAL-COSTS> 66,274
<OTHER-EXPENSES> 29,614
<LOSS-PROVISION> 2,107
<INTEREST-EXPENSE> 994
<INCOME-PRETAX> 13,971
<INCOME-TAX> 6,217
<INCOME-CONTINUING> 7,754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,754
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 5,161
<SECURITIES> 0
<RECEIVABLES> 87,760
<ALLOWANCES> 6,027
<INVENTORY> 29,836
<CURRENT-ASSETS> 126,663
<PP&E> 79,216
<DEPRECIATION> 44,499
<TOTAL-ASSETS> 201,997
<CURRENT-LIABILITIES> 57,443
<BONDS> 43,681
0
0
<COMMON> 79
<OTHER-SE> 96,081
<TOTAL-LIABILITY-AND-EQUITY> 201,997
<SALES> 353,769
<TOTAL-REVENUES> 353,769
<CGS> 227,478
<TOTAL-COSTS> 227,478
<OTHER-EXPENSES> 89,946
<LOSS-PROVISION> 2,861
<INTEREST-EXPENSE> 4,124
<INCOME-PRETAX> 32,484
<INCOME-TAX> 14,645
<INCOME-CONTINUING> 17,839
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,839
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.11
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 2,659
<SECURITIES> 0
<RECEIVABLES> 85,955
<ALLOWANCES> 5,457
<INVENTORY> 38,989
<CURRENT-ASSETS> 130,186
<PP&E> 77,137
<DEPRECIATION> 41,779
<TOTAL-ASSETS> 205,325
<CURRENT-LIABILITIES> 65,050
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 91,467
<TOTAL-LIABILITY-AND-EQUITY> 205,325
<SALES> 252,545
<TOTAL-REVENUES> 252,545
<CGS> 162,411
<TOTAL-COSTS> 162,411
<OTHER-EXPENSES> 63,904
<LOSS-PROVISION> 1,897
<INTEREST-EXPENSE> 2,807
<INCOME-PRETAX> 23,952
<INCOME-TAX> 10,659
<INCOME-CONTINUING> 13,293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,293
<EPS-PRIMARY> .84
<EPS-DILUTED> .83
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 2,462
<SECURITIES> 0
<RECEIVABLES> 79,540
<ALLOWANCES> 4,881
<INVENTORY> 37,305
<CURRENT-ASSETS> 118,136
<PP&E> 76,610
<DEPRECIATION> 39,325
<TOTAL-ASSETS> 196,146
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 86,992
<TOTAL-LIABILITY-AND-EQUITY> 196,146
<SALES> 158,769
<TOTAL-REVENUES> 158,769
<CGS> 100,908
<TOTAL-COSTS> 100,908
<OTHER-EXPENSES> 40,608
<LOSS-PROVISION> 1,336
<INTEREST-EXPENSE> 1,405
<INCOME-PRETAX> 16,073
<INCOME-TAX> 7,157
<INCOME-CONTINUING> 8,916
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,916
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 468
<SECURITIES> 0
<RECEIVABLES> 79,966
<ALLOWANCES> 3,638
<INVENTORY> 29,240
<CURRENT-ASSETS> 110,702
<PP&E> 75,346
<DEPRECIATION> 37,033
<TOTAL-ASSETS> 186,892
<CURRENT-LIABILITIES> 91,124
<BONDS> 12,474
0
0
<COMMON> 79
<OTHER-SE> 81,785
<TOTAL-LIABILITY-AND-EQUITY> 186,892
<SALES> 71,200
<TOTAL-REVENUES> 71,200
<CGS> 46,030
<TOTAL-COSTS> 46,030
<OTHER-EXPENSES> 17,509
<LOSS-PROVISION> 93
<INTEREST-EXPENSE> 221
<INCOME-PRETAX> 7,580
<INCOME-TAX> 3,335
<INCOME-CONTINUING> 4,245
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,245
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 12,074
<SECURITIES> 0
<RECEIVABLES> 52,111
<ALLOWANCES> 3,545
<INVENTORY> 16,133
<CURRENT-ASSETS> 79,236
<PP&E> 66,710
<DEPRECIATION> 35,029
<TOTAL-ASSETS> 125,521
<CURRENT-LIABILITIES> 39,857
<BONDS> 7,762
0
0
<COMMON> 78
<OTHER-SE> 77,656
<TOTAL-LIABILITY-AND-EQUITY> 125,521
<SALES> 245,306
<TOTAL-REVENUES> 245,306
<CGS> 165,765
<TOTAL-COSTS> 165,765
<OTHER-EXPENSES> 60,079
<LOSS-PROVISION> 1,486
<INTEREST-EXPENSE> 1,099
<INCOME-PRETAX> 18,706
<INCOME-TAX> 8,044
<INCOME-CONTINUING> 10,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,662
<EPS-PRIMARY> .69
<EPS-DILUTED> .68
</TABLE>
